Exhibit 13
2005 ANNUAL REPORT
20
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TWENTY YEARS
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[LOGO] SFC
STEWARDSHIP FINANCIAL CORPORATION
AND SUBSIDIARY
ON THE COVER
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CELEBRATING 20 YEARS OF SERVICE
TO NORTHERN NEW JERSEY
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Commit to the Lord whatever you do, and your plans will succeed.
PROVERBS 16:3
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Twenty years ago, a group of Christian businessmen in northern New Jersey shared
an unconventional vision. They would start up a community bank that would be
grounded on solid Christian principles and would tithe, or give back, ten
percent of its earnings to the community.
A bank that tithes? This concept was in stark contrast to the typical business
image of a bank, and it was certainly revolutionary. But the bank's founding
fathers committed their way to the Lord, and standing firmly on that commitment
they went out into the community and obtained the support they needed to make
their dream a reality.
In 1985 they established the Atlantic Stewardship Bank, in Midland Park,
New Jersey. The bank quickly took root and grew strong, continually attracting
new customers and branching out into neighboring communities. The rest is
history... a fruitful history of blessings, good stewardship, delighted
customers, and visionary leadership.
In 2005, twenty years later, the bank remains grounded on God's Word. Its name
remains the same. Its commitment remains unchanged. The Atlantic Stewardship
Bank has flourished to ten established branches and 27,000 accounts. And, the
original vision to tithe back to the community continues to define its mission.
The Stewardship Financial Corporation and Atlantic Stewardship Bank thank our
Lord, Jesus Christ, for His mercy and faithfulness and for His enduring favor
that has enabled the bank to achieve 20 years of service to northern New Jersey.
We thank our shareholders for their belief in our mission. And we thank our
ever-growing family of customers for their loyalty and support; we look forward
to serving their needs for generations to come.
OUR MISSION
The Atlantic Stewardship Bank was established to serve the northern New Jersey
community's financial needs and to give back, or tithe, one-tenth of our
earnings to the community.
We are a confident and progressive institution that meets business and
individual banking deposit and borrowing needs. We understand the value of each
and every customer and make it a priority to treat each customer fairly and with
respect. By investing prudently we safeguard assets, provide ample capital
growth, and recognize our shareholders with a proper return. As a responsible
and accountable employer, we cultivate a caring professional environment where
our associates can be productive and are encouraged to grow.
We are an independent commercial bank that stands on solid Christian principles
and the American banking regulations established by the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance Corporation, and the
State of New Jersey. We hold these fundamentals paramount in every decision we
make; for the good of our customers, our shareholders, and our employees.
2005 ANNUAL REPORT o TWENTY YEARS
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o FINANCIAL HIGHLIGHTS o
2005 2004 % CHANGE
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FOR THE YEAR ENDED DECEMBER 31 (Dollars in thousands, except per share amounts)
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Net income $4,480 $3,848 16.4%
Average shares outstanding 4,753 4,678 1.6%
Per common share
Basic net income 0.94 0.82 14.6%
Diluted net income 0.93 0.81 14.8%
Cash dividends declared 0.26 0.22 18.2%
Book value at year end 7.03 6.46 8.8%
BALANCE SHEET DATA AT DECEMBER 31
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Total assets 482,727 424,306 13.8%
Total gross loans 345,823 296,208 16.8%
Allowance for loan losses 3,847 3,299 16.6%
Total deposits 404,128 356,918 13.2%
Stockholders' equity 33,384 30,460 9.6%
CONSOLIDATED RATIOS
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Return on average assets 1.00% 0.95% 5.3%
Return on average equity 13.86% 13.48% 2.8%
Tier 1 capital to average assets (leverage) 8.71% 9.08% -4.1%
Tier 1 capital to risk-adjusted assets 11.16% 12.48% -10.6%
Total capital to risk-adjusted assets 12.21% 13.57% -10.0%
All share data has been restated to include the effects of 5% stock dividends
issued in November 2004 and November 2005, and a 4 for 3 stock split issued in
July 2005.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
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TOTAL ASSETS (IN MILLIONS)
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$279 $331 $402 $424 $483
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2001 2002 2003 2004 2005
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
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NET INCOME (IN THOUSANDS)
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$2,558 $3,116 $3,491 $3,848 $4,480
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2001 2002 2003 2004 2005
1
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
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o BOARD OF DIRECTORS o
STEWARDSHIP FINANCIAL CORPORATION AND ATLANTIC STEWARDSHIP BANK
[PHOTO OMITTED]
Standing left to right: Harold Dyer; Michael A. Westra, CPA; Margo Lane; Paul
Van Ostenbridge; John L. Steen; William J. Vander Eems; Howard R. Yeaton, Jr.,
CPA. Seated left to right: William C. Hanse, Esq.; Abe Van Wingerden; Arie
Leegwater; Robert J. Turner.
Arie Leegwater, Chairman
Retired
Harold Dyer
Retired
William C. Hanse, Esq.
Partner, Hanse & Hanse
Margo Lane
Sales and Market Coordinator
PBI - Dansensor America, Inc.
John L. Steen, Vice Chairman
President, Steen Sales, Inc.
President, Dutch Valley Throwing Co., Inc.
Robert J. Turner
Retired
William J. Vander Eems
President, William Van Der Eems, Inc.
Paul Van Ostenbridge
President and Chief Executive Officer
Stewardship Financial Corporation and
Atlantic Stewardship Bank
Abe Van Wingerden
President, Abe Van Wingerden Co., Inc.
T/A Van Wingerden Farms
Michael A. Westra, CPA *
General Manager, Wayne Tile Company
Howard R. Yeaton, CPA *
Managing Principal, Financial
Consulting Strategies
*WELCOMING TWO NEW DIRECTORS...
Stewardship Financial Corporation and the Atlantic Stewardship Bank wish to
welcome Michael A. Westra, CPA of Kinnelon, NJ and Howard R. Yeaton, Jr., CPA of
Ho-Ho-Kus, NJ to our Board of Directors.
Mr. Westra is General Manager of Wayne Tile Company in Wayne, NJ. He holds a BS
in Accounting from Calvin College in Grand Rapids, MI and serves as Chairman of
the Finance Team for the Christian Reformed Church Eastern Home Mission Board.
Mr. Westra is a former member of Atlantic Stewardship Bank's Business
Development Board for Passaic and Morris Counties.
Mr. Yeaton is Managing Principal for Financial Consulting Strategies in
Ho-Ho-Kus, NJ. He holds an MBA from the University of Connecticut and a BS in
Accounting from Florida State University. He is a member of the Financial
Executives Institute and the American Institute of CPAs. Mr. Yeaton has served
as a member of Atlantic Stewardship Bank's Bergen County Business Development
Board.
NEW BUSINESS DEVELOPMENT BOARDS
BERGEN BOARD
Janyce Bandstra
Janet Braen
Douglas Bushoven, CPA
William R. Cook
Thomas G. Dykhouse
Robert Galorenzo, M.D.
Paul D. Heerema
Ruth Knyfd
Bartel Leegwater
Edward Nieuwenhuis, Jr., M.D.
Roger Steiginga
Allen Stiles
David Visbeen
PASSAIC / MORRIS BOARD
William C. Bartlett
Donald De Bruin
David De Vries
George Forshay
Robert Fylstra, CPA
Garret Hoogerhyde, CPA
Shanti Jost
Ruth Kudor
Wayne R. Kuiken
Darryl Siss, Esq.
Benard W. Thomas, Jr.
Arie Van Vugt
Clifford Vander May
Anita Van Wingerden
Charles Verhoog
Ralph Wiegers
SPECIAL APPRECIATION
We extend a note of thanks to our friends and associates who successfully
completed their terms as members of the Bank's New Business Development Boards:
Paul Ruitenberg, Brian Hanse, Esq., CPA, and Ruth Kuiken. We deeply appreciate
all of their efforts in promoting the Bank within the community.
2
2005 ANNUAL REPORT o TWENTY YEARS
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o SHAREHOLDER INFORMATION o
The Annual Shareholders' Meeting for Stewardship Financial Corporation will be
held at the Christian Health Care Center, 301 Sicomac Avenue, Wyckoff, New
Jersey on Tuesday, May 9, 2006 at 7:00 p.m. (please use the Mountain Avenue
entrance). The Corporation had 955 Shareholders of Record on December 31, 2005.
Registrar and Transfer Company, 10 Commerce Drive, Cranford, NJ 07016, is the
transfer agent for Stewardship Financial Corporation common stock. We invite you
to contact them at 800-368-5948 should you wish to transfer stock or to join the
Dividend Reinvestment Plan. You may continue to contact the Corporate Services
Division of Stewardship Financial Corporation at 201-444-7100 or 877-844-BANK
for additional information.
DIVIDEND REINVESTMENT PLAN
A total of 750 Shareholders currently participate in the Corporation's
Shareholder Dividend Reinvestment Plan, representing 2,607,976 or 54.5% of all
shares outstanding. Plan participants reinvest cash dividends to purchase new
shares of stock at 95% of the market value, based on the most recent trades.
Shareholders interested in joining the Dividend Reinvestment Plan may request a
Plan Membership Form from Registrar and Transfer Company.
ANNUAL REPORT
Stewardship Financial Corporation will provide a copy of the Annual Report on
Form 10K, free of charge to any shareholder upon written request, including the
financial statements and schedules which have been filed with the Securities and
Exchange Commission. Requests should be addressed to Stewardship Financial
Corporation, Attn: Corporate Services, 630 Godwin Avenue, Midland Park, NJ
07432-1405.
[PHOTO OMITTED]
Hawthorne Councilman, Richard Goldberg, presenting a plaque to President & CEO,
Paul Van Ostenbridge and Lafayette Avenue, Hawthorne Branch Manager, Alma Baxter
as the Chamber of Commerce recognized Atlantic Stewardship Bank as its corporate
citizen of the year.
CORPORATE GOVERNANCE
The Board of Directors' Audit, Nominating and Compensation Committee Charters;
as well as the Code of Ethical Conduct for Senior Financial Managers, are
available for viewing at www.asbnow.com. Visit the "Home" page and refer to the
"Investor Relations" section. This information is also available in print to
shareholders requesting same in writing.
RECENT HISTORY OF DIVIDENDS PAID
The Board of Directors of the Stewardship Financial Corporation is pleased to
pay, on February 1, 2006, a quarterly dividend to Shareholders of Record on
January 13, 2006, in the amount of $0.08 per share. Future dividends are
expected to be paid on May 1, August 1, and November 1, subject to Board
approval.
November 15, 2005 5% stock dividend
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November 1, 2005 $0.07
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August 1, 2005 $0.07
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July 1, 2005 4 for 3 split
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May 2, 2005 $0.06
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February 1, 2005 $0.06
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November 15, 2004 5% stock dividend
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November 1, 2004 $0.06
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August 1, 2004 $0.06
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May 1, 2004 $0.05
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February 1, 2004 $0.05
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
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TOTAL EARNINGS PER SHARE
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$0.58 $0.69 $0.76 $0.82 $0.94
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2001 2002 2003 2004 2005
3
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
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o MESSAGE TO THE SHAREHOLDERS o
DEAR SHAREHOLDERS AND FRIENDS
IN TODAY'S FINANCIAL SERVICES INDUSTRY, being in business for twenty years may
be considered a milestone for some. At Atlantic Stewardship Bank we prefer to
think of our first twenty years of service to the community not as a milestone,
but rather as a strong foundation for continued success in years to come.
What began as a single branch in Midland Park twenty years ago has grown into
ten successful branches distributed amongst three northern New Jersey counties.
And, an eleventh branch is currently planned to open in early 2007 in Wyckoff,
New Jersey.
We could provide shareholders of the Stewardship Financial Corporation, holding
company of the Atlantic Stewardship Bank, with many examples of enhancements and
developments that have taken place over the past twenty years. But we would much
rather highlight the positive results of 2005, our twentieth year of operations.
2005 was the most successful year in our history. The strong earnings are
attributed to continued expanded loan growth, enhanced fee income and diligent
management of the corporation's net interest margin.
[PHOTO OMITTED]
Atlantic Stewardship Bank's Waldwick Branch
We are pleased to report record earnings for the fiscal year ending December 31,
2005, with net income in the amount of $4.5 million. Earnings per diluted share
of $0.93 represent a 16.4% increase over the prior year's net income. The
earnings per share data reported in this Annual Report have been restated to
reflect a 5% stock dividend issued November 15, 2005 and November 15, 2004, in
addition to a 4 to 3 stock split issued on July 1, 2005. By every measure we had
a productive year. The 2005 annualized return on average assets was 1.00% and
the return on average equity was 13.86%. Our total assets grew 13.8% to $482.7
million. Total deposits grew 13.2% to $404.1 million and total net loans grew
16.8% to $342.0 million. Total shareholder equity grew 9.6% to reach $33.4
million at December 31, 2005.
The Atlantic Stewardship Bank's Tithing Program increased 18.4% in 2005 to
$689,000, the highest payout in the history of the program. Over 360 deserving
organizations shared in the Tithe with special emphasis given to local food
banks as well as to Christian missions, schools and health care facilities. The
Bank is also grateful for the services provided to the community by local civic
non-profit organizations and as such supports these groups with donations as
well.
This year's achievements were accomplished as a result of outstanding teamwork
amongst our associates at every level,
4
2005 ANNUAL REPORT o TWENTY YEARS
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dedication to service and quality, and the successful execution of Management's
vision for the corporation.
[PHOTO OMITTED]
Bernie Joustra, Vice President of Lending offering service of a different kind
to a happy and hungry Lafayette Avenue customer.
Atlantic Stewardship Bank's branch network distinguishes itself from other
financial institutions. Not only are branches strategically located to best
serve the needs of business and individual customers, each branch is
specifically designed to service its unique community. In 2005 we were pleased
to relocate our Waldwick branch from a storefront to a freestanding Victorian
home at 64 Franklin Turnpike. This antique home boasts the finest of
contemporary equipment while maintaining the charms of a bygone era.
In keeping with the growth strategy of expanding our branch network into new
markets, we took advantage of an opportunity that presented itself in Montville,
Morris County, New Jersey. A full service branch is scheduled to open at 2
Changebridge Road at the corner of Route 202 during the first quarter of 2006.
And as already noted, plans are underway for the new branch in Wyckoff, New
Jersey next year.
The corporation made investments in technology in 2005 to help protect its
depositors against identity theft and fraud. We take this responsibility
seriously and plan to implement all appropriate precautions to safeguard
customers' assets and privacy.
[PHOTO OMITTED]
ASB associates ready, willing and able to work at the Paterson Habitat for
Humanity Corporate Challenge Build Day.
There are challenges on the horizon, not the least of which is the flattening
yield curve. The Asset and Liability Committee has responded appropriately
throughout the year to work within the current interest rate climate and will
continue to monitor and forecast rates going forward. The Committee is dedicated
to adjusting pricing and products to yield the best earnings for the corporation
and its shareholders.
The Stewardship Financial Corporation and the Atlantic Stewardship Bank added
two new members to their respective Board of Directors. Both Michael Westra and
Howard Yeaton bring strong, valuable financial backgrounds to the Boards. The
two new Directors qualify and serve as Financial Experts on the Audit Committee.
In closing, we would like to express sincere appreciation to all our customers,
our dedicated associates and the shareholders for continued support of this
unique corporation.
/s/ Arie Leegwater
Arie Leegwater
Chairman of the Board of Directors
/s/ Paul Van Ostenbridge
Paul Van Ostenbridge
President and Chief Executive Officer
5
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
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o THE BEACH CLUB o
For almost as long as the Atlantic Stewardship Bank has been in business,
there's been a BEACH Club. BEACH is an acronym for Bank Employees Assisting
CHarities, and every year the club members volunteer their after-hours time to
conduct a wide variety of activities to benefit the communities in which the
bank maintains branches. The bank's customers also participate, and are
tremendously generous and eager to contribute!
[PHOTO OMITTED]
Standing: Peggy Weber and Bill Tussi. Seated: Grace Lobbregt and Diane Schmitt.
In addition to the regular yearly programs that include a supper for the
homeless, Easter dinner baskets, blood drive, Thanksgiving food drive, Christmas
wish tree, and more; four new activities were added in 2005.
Two emergency relief donation drives were conducted. The New Year hit the ground
running with a Tsunami Relief Drive for the month of January. Then in September
the club got busy with a Hurricane Katrina Donation Collection. All donations
were given to the American Red Cross.
In the spring, the club ran a Baby Supply Collection among bank employees to
assist the American Red Cross Baby Basics Program - a need-based program that
distributes diapers and formula to families who cannot afford these essentials.
Throughout August the club ran a School Supply Drive among bank employees.
Notebooks, crayons, pens, pencils, and other supplies were collected to benefit
inner city children via the Star of Hope Ministries in Paterson, NJ.
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o OUR NEW HOME IN WALDWICK o
We've moved! And now our Waldwick customers enjoy ample parking, enhanced
services, and extended banking hours.
Atlantic Stewardship Bank has been serving the Waldwick community for nine
years. In November we relocated our Waldwick branch from the Waldwick Shopping
Center to a freestanding building at 64 Franklin Turnpike.
The new building is actually an old Victorian house, specially renovated to
accommodate the bank lobby while providing a unique and comfortable setting for
our customers.
Outside, parking is plentiful in our private parking lot; and there are two
drive up lanes, a 24/7 ATM, plus a night-drop. Inside, a full lobby plus safe
deposit boxes and a coin machine provide a complete range of banking services.
Additionally, we've extended our hours of operation to better accommodate the
wide variety of businesses in the area. The private parking, drive ups, and safe
deposit boxes are welcomed new additions for Waldwick customers.
Waldwick Branch Manager Kelly Nienhouse says, "Our Victorian branch is
beautifully restored and truly complements the neighborhood. It gives us a much
better presence in town, it's a warm and homelike place to visit, and our
customers really like it - they feel very welcome here and that's exactly what
we want."
[PHOTO OMITTED]
Standing left to right: Paul Van Ostenbridge, President & CEO; Linda Trancucci;
Raymond Santhouse, Regional Manager, Vice President; Daniel Post. Seated: Kelly
Nienhouse, Branch Manager, Administrative Assistant.
6
2005 ANNUAL REPORT o TWENTY YEARS
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o OUR 2005 TITHING PROGRAM o
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Each one should use whatever gift he has received to serve others,
faithfully administering God's grace in its various forms.
1 PETER 4:10
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Atlantic Stewardship Bank was founded on the Biblical Old Testament tenet of
tithing - meaning to give back one-tenth to God. In accordance with our unique
Tithing Program, each year the bank shares ten percent of its pre-tax earnings
with Christian and local civic non-profit organizations that attend to the
physical, emotional, and spiritual needs of others. Tithing defines our mission
and is written into our corporate by-laws.
Since the Atlantic Stewardship Bank was founded in 1985, we have shared over
four million dollars with hundreds of deserving organizations including inner
city missions and ministries, caring home environments for the elderly, food
pantries, police and fire departments, schools and libraries, and those who
labor to spread the Gospel overseas.
Record-breaking business in 2005 enabled us to make our largest tithe ever,
sharing $689,000 with 360 recipients. We are both grateful and proud of this
accomplishment... grateful to God for His many blessings and proud because each
and every one of our customers helped make it possible.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
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STEWARDSHIP FINANCIAL CORPORATION -
2005 TITHE (IN THOUSANDS)
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$351 $425 $512 $582 $689
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2001 2002 2003 2004 2005
Thanks to our ever-growing family of customers, ASB's Tithing Program has
increased its donations every year.
[PHOTO OMITTED]
Mona Timms, School Principal at the Dawn Treader School of Paterson, NJ is
presented with a Tithing check by Alma Baxter, Branch Manager and Richard
Schuurman, New Business Development.
[PHOTO OMITTED]
Vice President, Midland Park Manager, Raymond J. Santhouse presenting a donation
charity check to Midland Park Mayor, Esther Vierheilig.
7
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
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WE ARE PLEASED TO HAVE ASSISTED THE FOLLOWING ORGANIZATIONS WITH OUR 2005 TITHE
DISTRIBUTION:
*Africa Inland Mission
*American Christian School
*Baptist Haiti Mission
*Bergen County Habitat For Humanity
*Bessie Green Community, Inc.
*Bethany Christian Services
*Calvary Christian Academy
*Calvin College
*Calvin Theological Seminary
*Cary Christian Center, Inc.
*Christian Health Care Center
*Christian Reformed World Relief Committee
*Christian Schools International Foundation Trust Fund
*Congress of National Black Churches
*CUMAC/ECHO, Inc.
*Dawn Treader School (ECUMP)
*Eastern Christian Children's Retreat
*Eastern Christian School Association
*Eastern Home Mission Board
*Elim Christian Services
*Eva's Village
*Faith Ministries of White Lake NY
*Father's Cupboard
*Fellowship Homes
*Fig Orchard
*First Choice Women's Resource Centers
*Florence Christian Home
*Friendship Ministries
*Gideons International Lakeland Camp
*Gideons International Passaic Valley Camp
*Gideons International Paterson Camp
*Gideons International Ramapo Camp
*Good Shepherd Mission, Inc.
*Goshen Christian School
*Grace Counseling Ministries
*Hackensack Christian School
*Harvest Outreach Ministries
*Hawthorne Christian Academy
*Hawthorne Ecumenical Social Service Fund - Food Pantry
*Holland Christian Home
*International Networx
*Lancaster Bible College
*Life Advocates, Inc.
*Life Givers Network
*Little Sisters of The Poor
*Lord's Day Alliance of NJ
*The Luke Society
*Madison Avenue Baptist Church Academy
*Madison Avenue Crossroads Community Ministries
*Mary Help of Christians Academy
*Mississippi Christian Family Services, Inc.
*Mustard Seed School
*Netherlands Reformed Christian School
*New City Kids
*New Hope Community Development Center
*New Hope Ministries
*New Jersey Family Policy Council
*North Jersey Home School Association
*Northside Community Christian Reformed Church - Day Camp
*Northside Community Christian Reformed Church - Food Pantry
*Northwest Christian School
*Operation Double Harvest School, Haiti
*Paterson Habitat For Humanity
*Prison Fellowship Ministries
*Prison Fellowship Ministries - Angel Tree Program
*RACOM Associates - Back to God Hour
*Reformed Bible College
*Ridgewood YMCA
*Ringwood Christian School
*Ron Hutchcraft Ministries
*St. Anthony's School
*St. Luke's Community Development Center
*St. Philip's - Camp Youth Development Program & Coffee Pot Ministry
*St. Paul's Community Development Corp.
*Siena Village at Wayne
*Sonshine Christian Academy
*Star of Hope Ministries, Inc.
*Strategic Prayer Command
*Sussex Christian School
*Teen Challenge of NY and NJ
*The Salvation Army - Paterson Branch
*Touch The World Ministries
*Trinity Christian School
*United Paterson Development FBO After School Literacy & Safe Space Programs
*Unity Christian Reformed Church After School Program
*Veritas Christian Academy
*Waldwick Seventh Day Adventist School
*Wayne Interfaith Network
*Westminster Theological Seminary
*World For Christ Crusade, Inc.
*Wyckoff Christian Pre-School
*Wyckoff Family YMCA
*Wyckoff Reformed Church Food Pantry
* Denotes Christian Charity
ADDITIONALLY, THE BANK HAS PROVIDED SUPPORT THROUGHOUT 2005 TO THE FOLLOWING
ORGANIZATIONS:
American Cancer Society Bergen County
*American Family Association
American Foundation for Suicide Prevention
American Heart Association
American Legion Auxiliary
American Legion Post 53
American Red Cross Bergen Crossroads
Association for Special Children and Families
Barnert Hospital Foundation
Bergen Community College Foundation
Bergen County Community Housing In Partnership (CHIP)
Bergen County Special Olympics Program
Bergen Philharmonic Orchestra
*Bethlehem Lutheran Church Upward Christian Basketball League
Bloomingdale Cornet Band
Boys & Girls Club of Hawthorne
Boys & Girls Club of Paterson
Boy Scouts of America Northern NJ Council
Boy Scout Troop 7 - Ridgewood
Breast Cancer Walk
Calvin Coolidge School PTO
Camp Hope of Hackensack Outreach
*Cathedral Choir
Center for Food Action
Chabad Center
Children's Aid & Family Services, Inc.
Chilton Memorial Hospital Foundation
*Christian Overcomers
*Christian Radio Station WAWZ
Cody's Foundation
Community Blood Services Foundation
Community Meals, Inc.
Compassion International
Co-Operative Nursery School of Ridgewood
Creative Living Counseling Center
*Crispus Attucks Scholarship Foundation, Inc.
Cystic Fibrosis Foundation
DACCKs Group for Supportive Housing
Deborah Hospital Foundation
*DePaul Catholic High School
*Don Bosco Prep High School
*Emmanuel Baptist Church - Women of Emmanuel
Emmanuel Cancer Foundation
Executive Women's Golf Association Northern NJ Chapter
*Faith Chapel Reformed Church Youth Ministry
*Fellowship of Christian Firefighters
Flow Follies
Forum School
Foundation For Free Enterprise
Foundation For The Handicapped
Friends of Marge DeMichino Fund
Friends of The Hermitage
Friends of The Louis Bay 2nd Library
Friends of The Midland Park Library
*Frost Valley YMCA
Gift of Life - Rotary Clubs in District 7490
Girl Scout Council of Bergen County
*Guardian Angel Church - Youth Ministry
Hawthorne Baseball/Softball Association
Hawthorne Board of Health - Food Pantry
Hawthorne Caballeros
Hawthorne Chamber of Commerce
Hawthorne Community Library Foundation, Inc.
Hawthorne Domestic Violence Response Team
Hawthorne Fall Baseball
*Hawthorne Gospel Church - Ecuador Mission Trip
Hawthorne High School
Hawthorne High School PTO
Hawthorne High School - SHARE
Hawthorne Hurricanes
Hawthorne Knights of Columbus
Hawthorne Lions Club
Hawthorne PBA Local #200
Hawthorne Public Schools
Hawthorne Rotary Club
Hawthorne Soccer Association
Hawthorne Special Recreation
8
2005 ANNUAL REPORT o TWENTY YEARS
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Hawthorne Thomas Jefferson School PTO
Hawthorne Volunteer Fire Department
Hawthorne Washington School PTO
Hawthorne William B. Mawhinney Memorial Ambulance Corps.
*Healing The Children Midlantic, Inc.
*Hispanic Multi-Purpose Service Center
Housing Partnership for Morris County
*Interchurch Softball League
*Interfaith Shelter & Community Outreach
Jack Elwood Fund
Jamboree Scholarship Fund, Inc.
Jewish Family & Children's Service of Wayne
Jerry Speziale Community Outreach Foundation
*John M. Perkins Foundation
Knights of Columbus Ramapo Valley Council
Knights of Columbus #5257 - Waldwick
Ladies Auxiliary to the Veterans of Foreign Wars of US
Leukemia & Lymphoma Society
Lodi/Garfield UNICO
The Love Fund of Midland Park
Lupus Foundation of America NJ Chapter
*Mattaniah Choir Committee
Midland Park Ambulance Corps.
Midland Park Baseball Association
Midland Park Boy Scout Troup 157
Midland Park Chamber of Commerce
Midland Park High School
Midland Park Lions Club
Midland Park PBA
Midland Park Volunteer Fire Co. & Auxiliary
Mohawk Athletic Club of Hawthorne
Molly Foundation for Juvenile Diabetes
Montclair State University
Montville Baseball Softball Association
Montville High School Field Corps
Morris County Boys & Girls Club
*Mount Bethel Baptist Church - MLK Jr. Day
*New Bridge Services, Inc.
New Jersey Citizen Action
New Jersey Community Development Corporation
New Jersey Community Loan Fund
*New Jersey District-Lutheran Church Missouri Synod
New Jersey State Organization of Cystic Fibrosis
North Jersey Chorus
*North Jersey Home School Association Choral Program
Oasis
*Our Lady of the Valley School
Paramus Association for Competitive Gymnastics
Paramus Girl's Softball Association
Passaic Valley Hospice
Passaic County Bar Association
Passaic County Council on Alcohol & Drug Abuse
Passaic Rotary Club
Paterson Chamber of Commerce
*Paterson YMCA
Paterson Youth Photography Project
Patriots' Path Council, Boy Scouts of America
*Pequannock Holy Spirit School
*Pequannock Holy Spirit Shelter Program
Pequannock Soccer Club
Pequannock Township First Aid & Rescue Squad
Pequannock Township Food Pantry
Pequannock Township High School
Pequannock Township High School Marching Band
Pequannock Township High School Panther Football
Pequannock Township Historic District Commission
Pequannock Township Little League
Pequannock Township PBA Local #172
Pequannock Township Public Library
Pequannock Township Regional Chamber of Commerce
Pequannock Township Volunteer Fire Department Engine #1
Pequannock UNICO
Pequannock Valley Rotary
*Pioneers Summer Mission Trip
Pompton Falls Fire Department #3
Preakness Volunteer Fire Company No. 4
Pro Arte Chorale
Project Lovematch
*Project Timothy
Prospect Park Volunteer Fire Department
*Puritan Reformed Theological Seminary
Raiders Drum and Bugle Corps of Wayne
Ramapo Boosters Association
Ramapo High School
Ridgewood Baseball Association
Ridgewood Chamber of Commerce
Ridgewood Downtown for The Holidays
Ridgewood Education Foundation
Ridgewood Emergency Services
Ridgewood Fire Department Association
Ridgewood Fourth of July Committee
Ridgewood Gilbert & Sullivan Opera Company
Ridgewood High School
Ridgewood High School Football Scholarship Committee
Ridgewood High School Yearbook
Ridgewood Lacrosse Association
Ridgewood PBA Local #20
Ridgewood Public Library
Ridgewood Rotary Club
Ridgewood SHARE
Ridgewood Singers
Ridgewood Softball
Ridgewood Woman's Club
*Ridgewood YWCA & YMCA of Bergen County
Rotary Foundation Annual Programs Fund
Ruth Estrin Goldberg Memorial
Saddle River Day School Development Fund
*St. Augustine Presbyterian Church Multi Service Center
*St. Joseph's Church - Haiti Ministry
*St. Joseph's Paterson Hospital Foundation
*St. Philip's Academy
*St. Thomas More School
Salamm Shrine Circus Program
Shomrei Torah - Wayne Congregation
*Sixth Reformed Church FBO Hurricane Katrina
Social Service Association of Ridgewood & Vicinity
Sons of the American Legion Post
Special Olympics of New Jersey
Special Projects for Underprivileged and Disabled
*Street Life Ministries
Suburban Woman's Club of Pompton Plains
Summit Speech School
The Arc of Bergen and Passaic Counties
The Community Church of Ridgewood - Project Hope, Haiti
The Order of the Lamp Scholarship Fund
Tomorrow's Children's Fund
Torpedoes Soccer Club
Tri County Chamber of Commerce - Wayne
Tri-County Cruisers, Inc.
*Turning Point
Upper Saddle River-Allendale Football & Cheerleading Association
US Gymnastics Development Center II Parents Association
Valley Hospital
Veritans Camp
Waldwick Baseball Association
Waldwick Borough
Waldwick Chamber of Commerce
Waldwick Education Foundation
Waldwick Fire Department
Waldwick High School
Waldwick High School Booster Club
Waldwick Julia A. Traphagen School PTO
Waldwick Lions Club
Waldwick PBA
Waldwick Public Library
Waldwick Recreation Trust Fund
Waldwick Soccer Association
Waldwick Volunteer Ambulance Corps.
Wayne Adult Community Center
Wayne Albert Payson Terhune School PTO
Wayne Boys And Girls Club
Wayne Community Volunteer Fire Company
Wayne Counseling and Family Services
Wayne Day
Wayne George Washington Middle School PTO
Wayne Hills High School
Wayne Hills High School Band Boosters
Wayne Lafayette School PTO
Wayne Lions Club
Wayne Little League - NJ District 2
Wayne Police Athletic League
Wayne PBA Local 136
Wayne Public Library
Wayne Rotary Club Foundation
*Wayne St. Joseph's Hospital Foundation
Wayne Schuyler Colfax PTO
Wayne Township Memorial First Aid Squad
Wayne Township Parks and Recreation Department
Wayne Valley High School Football Booster Club
Wayne Valley High School PTO
Wayne Valley Ice Hockey Booster Club
West Bergen Mental Healthcare, Inc.
William Paterson University
Wyckoff Education Foundation
Wyckoff Fire Department
Wyckoff Fire Department Ladies Auxiliary
Wyckoff-Midland Park Rotary Club
*Wyckoff Reformed Church Youth Ministry
Wyckoff Volunteer Ambulance Corps.
YM-YWHA of North Jersey
*YWCA of Bergen County
Youth Consultation Service
Youth Self Development, Inc.
* Denotes Christian Charity
9
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
o IN APPRECIATION o
Every year, Atlantic Stewardship Bank receives hundreds of letters of
appreciation in response to our Tithing Program distribution. It is a blessing
to know that the Lord is using our offerings for His purpose, and we are always
delighted to hear about it.
"On behalf of the Center for Food Action's board, staff, volunteers and most
especially its clients, thank you for the contribution made as part of Atlantic
Stewardship Bank's Tithing Program. We are very grateful to Atlantic
Stewardship Bank for its continuing support. CFA is dedicated to relieving
hunger and homelessness locally and your funding will help us carry out this
mission.
Last year, CFA distributed $1.3 million worth of donated food - 39,000 food
packages to individuals in Bergen and Passaic counties. CFA also paid $500,000
in rent and utility bills for its clients so that families could stay in their
own homes, with heat and lights during difficult times. We would not be able to
do this important work without the support of those in our community who care
about their poorest neighbors.
Thank you for making a difference."
Patricia Epsy
Executive Director, Center for Food Action
Englewood, NJ
- --------------------------------------------------------------------------------
"On behalf of the school board of Trinity Christian School I would like to thank
you for your recent gift to support our work. We appreciate the perspectives of
Atlantic Stewardship Bank as you turn back a part of the fruits of your labors
into the Lord's work. May He continue to prosper you as you maintain that
commitment.
Thank you again for helping to sustain our labors at TCS to see a rising
generation prepared to serve God in His world."
Charles E. Davies
Trinity Christian School
Montville, NJ
- --------------------------------------------------------------------------------
"On behalf of the Ridgewood Public Library Foundation, I thank Atlantic
Stewardship Bank for the generous contribution. Your gift will ensure that the
library flourishes in years to come.
Please accept our gratitude for your thoughtful contribution, which is providing
a guarantee for the Library's tradition of excellence. We will keep you informed
on the activities of the Foundation."
Glenn F. Jorgensen
President, Ridgewood Public Library Foundation
Ridgewood, NJ
- --------------------------------------------------------------------------------
"The Board members of Florence Christian Home thank you for your continued
remembrance of our ministry to girls. The ministry of our home is again the
recipient of your Tithing Gift.
We are thankful and happy the Lord blesses you in your banking service. We
appreciate your expertise in financial matters. Being blessed by the Lord
enables you to assist many in their charitable endeavors, who are grateful."
Nell Hartog
Assistant Treasurer, Florence Christian Home
Wayne, NJ
- --------------------------------------------------------------------------------
"On behalf of the Eastern Christian School Association and the students and
families that we serve, please accept our sincere thanks for the generous
contribution received from Atlantic Stewardship Bank.
We are truly grateful for the continuing support of Atlantic Stewardship Bank
for the mission of Eastern Christian School. For more than 20 years, you have
faithfully upheld us with your generous contributions and allowed us to continue
on our mission of providing an excellent, Christ-centered education to the
covenant children of this community.
Please extend our appreciation and warmest best wishes to your Board of
Directors and the officers and associates of the bank for this generous
contribution and for the wonderful support that you have provided to our mission
for so many years."
Thomas G. Dykhouse
President, Board of Directors, Eastern Christian School Association
North Haledon, NJ
- --------------------------------------------------------------------------------
"We gratefully acknowledge your donation and thank you for your generous support
of Faith Ministries of White Lake, Faith Hall Youth Center. Your donation is a
tremendous encouragement and reminder that God's work, done God's way, will meet
with God's blessing. We deeply appreciate your investment in a program that will
have a significant impact for Christ among our community.
We admire your Tithing Program and pray God's blessing upon this endeavor to
honor Him. As you have `cast your bread upon the waters,' may it return to you
multiplied."
David Coon
Faith Ministries, White Lake, NY
- --------------------------------------------------------------------------------
10
2005 ANNUAL REPORT o TWENTY YEARS
- --------------------------------------------------------------------------------
"On behalf of the members of the Hawthorne Ecumenical Council and the
congregations that the Council represents, we want to say thank you to Atlantic
Stewardship Bank for your gracious gift to our ministry. Your kindness and
passion for giving is remarkable.
The Hawthorne Ecumenical Council is a wonderful group of servants of Jesus
Christ. The Council also has a passion for giving and service. However, our
resources are often limited. Your tremendous gift will help sustain us as we
continue to reach out to the community of Hawthorne and beyond. There are many
people in need, especially single mothers and children who are unable to
purchase food. Your gift will enable us to respond to these emergencies.
May God bless you as you continue to serve your customers and offer gifts
through your tithing program."
Pastor Eric Nichols
Hawthorne Ecumenical Council, Hawthorne, NJ
- --------------------------------------------------------------------------------
"On behalf of the Board of Trustees of West Bergen Mental Healthcare Foundation
and the many clients this gift will help, I would like to thank you and the
Board of Atlantic Stewardship Bank for the gift. We are sincerely appreciative
that West Bergen is included in the Bank's annual tithing program.
As you know, West Bergen will be using the donation toward our Endowment
Campaign. The Campaign's goal is to fund the salaries of our high-cost
professionals - child psychiatrists and psychologists. While these professionals
are vital to mental health service, so many of those receiving their help cannot
fully pay for this valuable service. Additionally, your gift will be matched
through a challenge grant.
Thank you for your recognition of the need for mental healthcare services for
our community's youth."
Philip E. Wilson, LCSW
Chair, West Bergen Mental Healthcare
Ridgewood, NJ
- --------------------------------------------------------------------------------
"On behalf of the Officers and Members of the Wayne Township Memorial First Aid
Squad, I would like to thank you for your donation to our volunteer
organization.
It is through the generosity of individuals such as yourselves that we are able
to continue to provide the Township of Wayne with emergency ambulance services."
Marlyse Vanderwal
Wayne Township Memorial First Aid Squad
Wayne, NJ
- --------------------------------------------------------------------------------
"On behalf of the Hawthorne Fire Department, our Auxiliary and Junior Fire
Fighters, we would like to thank all of you for your generosity.
In this day and age it is difficult to find an organization such as Atlantic
Stewardship Bank that truly cares about not only their customers but the
boroughs they serve.
Please share this with all of your employees as they are a special breed of
personnel that make Atlantic Stewardship a special bank.
With my heartfelt thanks for your continued generosity!"
Joseph Speranza
Chief, Hawthorne Fire Department
Hawthorne, NJ
- --------------------------------------------------------------------------------
"Thank you for supporting Christian Schools International and the work we do for
Christian schools throughout North America. Your generous gift to the CSI
Foundation is truly a blessing.
Thanks to the foundation's support, CSI is able to provide Christian schools
with valuable services. For example, CSI publishes Christian textbooks so that
students in Christian schools will learn about the world from the perspective of
God's Holy Word.
CSI is 500 schools, 10,000 teachers, and 100,000 students working together - all
under the Lord's rule to provide excellent Christ-centered education. Your
ongoing financial support helps make this possible. Christian school students,
teachers, and administrators depend on it."
Lori Feenstra
Director of Advancement, Christian Schools International
Grand Rapids, MI
- --------------------------------------------------------------------------------
"It is with a sincere and grateful heart that I write on behalf of CUMAC/ECHO,
Inc. to say thank you for your tithe.
We have had a rather rough week. We are besieged with unpleasant news that our
funding from the federal government has been cut by 18%. Our funding from the
county is about four months behind and counting. We've been told by our mechanic
that our 10-year-old van which we use every day will have to be replaced. But
yet, the word around here has been, `Don't worry, God will provide.'
In today's mail, we received your check. It certainly could not have come at a
better time. It is thanks to organizations like yours that we can continue to
provide food for those less fortunate. Thank you."
Laura Purdy
Director of Administration, CUMAC/ECHO, Inc.
Paterson, NJ
- --------------------------------------------------------------------------------
11
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
o 2005 TITHING PROGRAM RECIPIENTS o
The Atlantic Stewardship Bank is pleased to introduce three outstanding
organizations that serve the Bank's local communities and have been long-term
recipients of our Tithing Program. It is an honor for us to help support their
work.
EASTERN CHRISTIAN SCHOOL ASSOCIATION
North Haledon, NJ o www.easternchristian.org
[PHOTO OMITTED]
Eastern Christian School's mission is to provide an excellent academic education
in the context of a Christian worldview. It does that for 915 students from
Pre-K through High School on its three campuses in Midland Park, Wyckoff, and
North Haledon. These students come from over 40 communities and 140 different
Christian churches in northern New Jersey. They come to Eastern Christian for
the outstanding curriculum, the individualized attention, the development of a
keen moral sense, and a preparation for a life of Christian discipleship.
Founded in 1892, Eastern Christian is the oldest and largest Christian day
school in the New York Metropolitan area. It is parent-governed by an elected
Board of Directors and financed by student tuition and the substantial support
it receives from local churches, alumni, and area businesses.
PEQUANNOCK TOWNSHIP FOOD PANTRY
Located in the First Reformed Church
Pompton Plains, NJ
[PHOTO OMITTED]
Joyce Forde-Muller Director of Food Pantry.
Since the 1980s, the Pequannock Township Food Pantry has been meeting a real
need that is not very apparent in the affluent community it serves. The pantry
is a Christian ecumenical mission outreach and depends upon year-round support
from most of the township's churches. Clients are referred to the pantry through
the Pequannock Town Hall Nurse; together they determine what is required and
schedule the days the clients can pick up food items, funds, or supermarket gift
certificates.
The Pequannock Township Food Pantry is currently serving 11 families and housing
one Hurricane Katrina survivor family. Clients are incredibly appreciative; if
not for the pantry they'd have no reasonable alternative for help. As a
Christian mission outreach the pantry provides for its clients in a convenient,
friendly, and truly caring way.
PATERSON HABITAT FOR HUMANITY
Paterson, NJ o www.patersonhabitat.org
[PHOTO OMITTED]
The Paterson Habitat for Humanity is a volunteer Christian ecumenical housing
ministry that gives low-income working families the chance to buy and build
homes of their own. That chance is made possible by the financial support of
corporate sponsors, area churches, non-profit organizations, and individual
donors. Homeowner families buy new homes at sharply discounted prices, financed
with interest-free Habitat mortgages.
Houses are actually built with volunteer labor supplied by the homeowner
families themselves, supported by a small army of Habitat construction
volunteers that includes many Atlantic Stewardship Bank employees who have been
sharing their skills and time for years. Since its founding in 1984, Paterson
Habitat for Humanity has built 170 new homes. With the need for decent,
affordable housing still desperate, they show no signs of slowing down.
12
2005 ANNUAL REPORT o TWENTY YEARS
- --------------------------------------------------------------------------------
o CUSTOMER CORNER o
At Atlantic Stewardship Bank, delivering outstanding customer service is a top
priority. We understand that satisfied, loyal customers are responsible for our
success and growth, and we treat them with respect and strive to know each one
by name. As a result, word-of-mouth is responsible for a good portion of our
business. Like family, our customers have grown along with us and we hold them
firmly in our thoughts and prayers.
In recognition of 20 years of service to northern New Jersey, it is an honor for
us to feature the following testimonials from customers who have been with us
since the beginning.
[PHOTO OMITTED]
"I still remember the day in 1985... my husband came home and said he had met
with Bill Heerema (one of ASB's founders and the first Chairman), and that Bill
was starting a bank and the bank was going to tithe. `We've got to invest in
this bank!' my husband said. He was so excited, and he got in on the ground
floor with stock, we opened our checking and savings accounts there, and then we
just added to it. Atlantic Stewardship Bank is wonderful. Because of their
concept, I think the Lord has truly blessed them with the right leadership, and
blessed them with success because of their faithfulness and all the sharing they
have done over the years.
I am so impressed with the bank's personnel. When I go there I'm not just an
account number. They know me, they ask how I'm doing, and they call me if
there's a problem... they're right on top of everything.
My three children and two stepsons also bank with Atlantic Stewardship. The kids
have been with the bank for seven or eight years and are very pleased; so much
so that they often recommend the bank to others. As a family, we recommend
Atlantic Stewardship to anyone who wants an enjoyable, personal, and top-quality
banking relationship."
Janet Braen
The Braen Family, Franklin Lakes, NJ
"We're a floor covering business; furnishing and installing carpet, vinyl
flooring, hardwood flooring, and laminate flooring throughout northern New
Jersey. My business partner, Jim Oosting and I have been running V&S for just
under 30 years.
We've been with Atlantic Stewardship Bank since they started up in 1985. We
began with some initial stock, we opened our business accounts with them, and
later we both brought our personal accounts there as well.
The bank's name, `Stewardship,' resonates with me. It reminds me that the monies
and assets I have are a blessing entrusted to me by God to be used wisely in His
kingdom. The bank demonstrates stewardship every day. They authenticate their
name when they tithe to all of those worthy organizations - that brings it
beyond words and into reality. And for folks receiving the benefit of that
tithing, it is absolutely wonderful. I know of organizations that benefit from
the bank's tithing, and it sometimes makes the difference as to whether or not a
community program can function. It makes a huge impact.
When you look at all the other banks around, you wonder how Atlantic Stewardship
can grow as much they have. I think they have touched a nerve in people with
their philosophy, and I think they are being blessed because of it."
Fred Everett
V&S Floor Covering, Midland Park, NJ
[PHOTO OMITTED]
Left to right: Jim Oosting and Fred Everett.
13
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
o PRODUCTS AND SERVICES o
Atlantic Stewardship Bank offers a full range of banking services designed to
help individual and business customers achieve their financial goals. Our
services include commercial and personal loans, mortgages, savings and checking
accounts, credit cards and debit cards, and electronic services including online
banking and automatic bill payment.
COMMERCIAL SERVICES
We offer a comprehensive range of commercial services for businesses of all
sizes located in northern New Jersey. Whether you're just starting out or an
established business, our relationship managers can assist you with everything
you need including business checking, lines of credit, commercial and
construction loans, commercial debit and credit cards, Bank Card Merchant
Accounts, loans for the latest technology, online & telephone banking, Night
Depository and more.
HOME EQUITY AND RESIDENTIAL MORTGAGE
We offer Home Equity and Residential Mortgage loans designed to assist customers
in northern New Jersey. Put your home to work for you with our fixed rate home
equity loan or one of our variable rate home equity lines of credit. Equity
+Plus, our interest-only line of credit, requires no principal reduction during
the initial five-year term of the loan. Pay only the monthly interest that will
float at the prime rate. Access your home equity line of credit instantly,
simply by writing a check. Equity +Plus is perfect for short-term borrowing
because it lets you use the equity in your home at a lower cost than a
traditional home equity line of credit.
Residential mortgages are available to purchase or refinance your primary
residence, second home or investment property. We offer a variety of mortgage
products including conventional and jumbo, fixed and variable rate, as well as
low/moderate income and first-time homebuyers programs.
Our interest-only fixed rate mortgage allows you to maximize your purchasing
power by qualifying at the interest-only payment. Make interest-only payments
for the first 15 years, and then a monthly payment based on a 15-year loan for
the remaining term on the then unpaid principal balance. During the
interest-only period, you can prepay the principal at any time and reduce your
next monthly payment. This option is perfect for borrowers that desire more
control of cash flow, first time homebuyers, relocation borrowers moving into a
higher cost area such as New Jersey, and self-employed borrowers with
fluctuating seasonal income.
IDEAL CHECKING
Our personal checking account offers so many extras you'll call it Ideal. Only a
$25 minimum deposit is required to open your account; your first year is free
(no monthly service fee), along with your first order of ASB logo checks. Online
banking is free as well.
In addition, you'll get $25 just for opening your account. Receive another $25
credit upon approval of a Master Money Debit Card. And another $25 credit when
you sign up for Direct Deposit within three months. And still another $25 credit
when you enroll in Payment Partner bill paying service.
After your first year, just maintain a $50 minimum balance and there are no
service fees.
STERLING LIFESTYLE CLUB
If you're 55 or older, take a look at our Sterling Lifestyle Club. The Sterling
Lifestyle Club is a multi-tiered interest-bearing checking account for seniors.
Maintain a minimum balance of $10,000 in the Sterling Lifestyle Club Account or
in combined accounts that can include checking, savings, CDs, IRAs, and money
market accounts to avoid a $10 monthly service fee. Up to five accounts can be
used to qualify.
Sterling Lifestyle Club members also receive 30 basis points over the current
rates offered on Atlantic Stewardship Bank's 18 to 60 month Power CD.
Value conscious seniors enjoy the substantial benefits and services of the
Sterling Lifestyle including unlimited monthly checking, free ASB logo checks,
no annual fee ASB credit and debit cards, and more.
ONLINE BANKING
Online Banking allows you to access your ASB account anytime, anywhere, as long
you have Internet access. Do almost anything that you can do at our offices
except get cash. Payment Partner, our online bill payment service, is a
hassle-free, flexible and secure way to pay your bills at your convenience.
Payment Partner eliminates the need to buy stamps, write checks and mail bills.
And, it's free as long as you pay one bill each month.
OTHER SERVICES
We offer a variety of additional services to meet your financial needs from
certified checks and money orders to telephone banking and traveler's checks.
Coin counting machines, drive-up banking and safe deposit boxes are also
available at certain branches.
For more information about Atlantic Stewardship Bank products and services,
speak with an ASB relationship manager or visit www.asbnow.com.
14
2005 ANNUAL REPORT o TWENTY YEARS
- --------------------------------------------------------------------------------
o OFFICERS o
STEWARDSHIP FINANCIAL CORPORATION OFFICERS
Arie Leegwater
Chairman of the
Board of Directors
Abe Van Wingerden
Vice Chairman of the
Board of Directors
Paul Van Ostenbridge
President and
Chief Executive Officer
Robert J. Turner
Secretary
Julie E. Holland
Senior Vice President
and Treasurer
Timothy G. Madden
Senior Vice President
Angela Turi
Vice President
Ellie King
Assistant Secretary
[PHOTO OMITTED]
Dave Madden center, Jeopardy Champion and his father Tim Madden, Senior Vice
President of Lending, depositing Dave's winnings with Paul Van Ostenbridge,
President & CEO.
ATLANTIC STEWARDSHIP BANK OFFICERS
Paul Van Ostenbridge
President and
Chief Executive Officer
Julie E. Holland
Senior Vice President
and Treasurer
Timothy G. Madden
Senior Vice President
James S. Donado
Vice President
Robert A. Giannetti
Vice President
M. Bernard Joustra
Vice President
Cynthia A. Perrotta
Vice President
Raymond J. Santhouse
Vice President
Gail K. Tilstra
Vice President
Angela P. Turi
Vice President
David J. Van Lenten
Vice President
Robert C. Vliet
Vice President
Alma M. Baxter
Assistant Vice President
Richard Densel
Assistant Vice President
Diane Ingrassia
Assistant Vice President
John S. Krantz
Assistant Vice President
Elizabeth M. Lamb
Assistant Vice President
James O'Brien
Assistant Vice President
Richard D. Powers
Assistant Vice President
Christine Fiduccia
Assistant Secretary
Ellie King
Assistant Secretary
Grace Lobbregt
Assistant Secretary
Kristine Rasile
Assistant Secretary
Louise H. Rohner
Assistant Secretary
Virginia M. Lowe
Compliance Officer
Daniel J. Girlando
Administrative Assistant
Kelly Nienhouse
Administrative Assistant
Judi Rothwell
Administrative Assistant
Jean M. Schaver
Administrative Assistant
Mary Beth Steiginga
Administrative Assistant
William J. Tussi
Administrative Assistant
Peggy Weber
Administrative Assistant
Kenneth C. Wehinger
Administrative Assistant
Cynthia Woods-Daisley
Administrative Assistant
[PHOTO OMITTED]
Pequannock Manager, Louise Rohner presenting a cruise package to the 20th
Anniversary Grand Prize winners, Mr. and Mrs. Carlo Cirrincione.
15
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
o STEWARDSHIP FINANCIAL CORPORATION o
SHAREHOLDER VALUE - ORIGINAL INVESTOR
Prior to the establishment of the Stewardship Financial Corporation holding
company, the stock was originally issued in the name of Atlantic Stewardship
Bank. The initial offering required a minimum purchase of 200 shares at a price
of $10.00 per share.
The Corporation declared its first cash dividend in 1990 and cash dividends have
since been paid annually. To assist interested shareholders in purchasing
additional shares of stock, the Board of Directors introduced a Dividend
Reinvestment Plan in 1994.
We are pleased to report the original investment of $2,000 was worth $22,119 as
of year-end 2005 when the assumption is made that the shareholder took advantage
of the Dividend Reinvestment Plan, stock splits as well as stock dividends. The
twenty-year return to the original investor is 12.77%.
CORPORATE ATTORNEYS
Stewardship Financial Corporation
McCarter & English, LLP
Attorneys at Law
4 Gateway Center
Newark, NJ 07102
973-622-4444
Atlantic Stewardship Bank
Hanse & Hanse
2035 E. Hamburg Turnpike
Wayne, NJ 07470
973-831-8700
STEWARDSHIP FINANCIAL CORPORATION STOCK
We are pleased to advise the following brokers make a market in Stewardship
Financial Corporation stock:
Highlander Capital Group, Inc.
119 Littleton Road
Parsippany, NJ 07054
973-402-2700
Ryan Beck & Company
18 Columbia Turnpike
Florham Park, NJ 07932
800-342-2325
and
7111 Fairway Drive, Suite 301
Palm Beach Gardens, FL 33418
800-793-7226
TRANSFER AGENT REGISTRAR AND DIVIDEND REIMBURSEMENT AGENT
To report a change of name or address, or a lost stock certificate or dividend
check, contact:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
800-368-5948
SHAREHOLDER RELATIONS
Stewardship Financial Corporation
Corporate Division
201-444-7100, extension 7118
www.asbnow.com
- --------------------------------------------------------------------------------
o BRANCH LOCATIONS AND STAFF o
HEADQUARTERS - MIDLAND PARK
630 Godwin Avenue
Raymond J. Santhouse
Branch Manager, Vice President
& Regional Manager
Richard Densel
Assistant Branch Manager
& Assistant Vice President
HAWTHORNE
1111 Goffle Road
Stephanie Howerton
Branch Manager
HAWTHORNE
386 Lafayette Avenue
Alma M. Baxter
Branch Manager & Assistant Vice President
Grace Lobbregt
Assistant Branch Manager
& Assistant Secretary
MONTVILLE
(TO BE INTRODUCED FIRST QUARTER 2006)
2 Changebridge Road
Judi Rothwell
Branch Manager
& Administrative Assistant
PEQUANNOCK
249 Newark-Pompton Turnpike
Louise Rohner
Branch Manager & Assistant Secretary
RIDGEWOOD
190 Franklin Avenue
Diane Ingrassia
Branch Manager & Assistant Vice President
WALDWICK
64 Franklin Turnpike
Kelly Nienhouse
Branch Manager
& Administrative Assistant
WAYNE
400 Hamburg Turnpike
Robert A. Giannetti
Branch Manager, Vice President
& Regional Manager
Amy Miller
Assistant Branch Manager
WAYNE HILLS
87 Berdan Avenue
Daniel Girlando
Branch Manager
& Administrative Assistant
Jed Paterson
Assistant Branch Manager
WAYNE VALLEY
311 Valley Road
Kristine Rasile
Branch Manager & Assistant Secretary
16
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL SUMMARY OF SELECTED FINANCIAL DATA
December 31,
-----------------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Earnings Summary:
Net interest income ............................ $ 18,211 $ 16,367 $ 14,324 $ 12,507 $ 10,866
Provision for loan losses ...................... (600) (540) (425) (160) (420)
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses .................. 17,611 15,827 13,899 12,347 10,446
Noninterest income ............................. 3,240 2,726 2,894 2,250 1,695
Noninterest expense ............................ 13,867 12,501 11,394 9,847 8,279
--------- --------- --------- --------- ---------
Income before income tax expense ............... 6,984 6,052 5,399 4,750 3,862
Income tax expense ............................. 2,504 2,204 1,908 1,634 1,304
--------- --------- --------- --------- ---------
Net income ..................................... $ 4,480 $ 3,848 $ 3,491 $ 3,116 $ 2,558
========= ========= ========= ========= =========
Common Share Data: (1)
Basic net income ............................... $ 0.94 $ 0.82 $ 0.76 $ 0.69 $ 0.58
Diluted net income ............................. 0.93 0.81 0.75 0.68 0.57
Cash dividends declared ........................ 0.26 0.22 0.18 0.15 0.13
Book value at year end ......................... 7.03 6.46 5.84 5.21 4.62
Average shares outstanding ..................... 4,753 4,678 4,616 4,523 4,440
Shares outstanding, net of
treasury stock at year end ................... 4,748 4,712 4,653 4,574 4,447
Dividend payout ratio .......................... 27.77% 26.46% 23.37% 21.41% 21.81%
Selected Consolidated Ratios:
Return on average assets ....................... 1.00% 0.95% 0.97% 1.03% 1.01%
Return on average stockholders' equity ......... 13.86% 13.48% 13.68% 14.01% 13.09%
Average stockholders' equity as
a percentage of average total assets ........ 7.20% 7.06% 7.12% 7.36% 7.74%
Tier-I capital leverage (2) .................... 8.71% 9.08% 8.89% 7.02% 7.45%
Tier-I risk based capital (3) .................. 11.16% 12.48% 12.93% 10.53% 10.65%
Total risk based capital (3) ................... 12.21% 13.57% 14.03% 11.74% 11.90%
Allowance for loan loss to total loans ......... 1.11% 1.11% 1.10% 1.24% 1.40%
Nonperforming loans to total loans ............. 0.15% 0.48% 0.42% 0.62% 0.52%
Selected Year-end Balances:
Total assets ................................... $ 482,727 $ 424,306 $ 401,768 $ 331,087 $ 278,523
Total loans, net of allowance
for loan loss .............................. 341,976 292,909 258,776 213,579 182,930
Total deposits ................................. 404,128 356,918 341,538 302,735 255,684
Stockholders' equity ........................... 33,384 30,460 27,149 23,817 20,553
(1) All share and per share amounts have been restated to reflect a 5% stock
dividend paid November 2001, 2002, 2003, 2004 and 2005, respectively, a 3
for 2 stock split that occurred July 2003 and a 4 for 3 stock split that
occurred July 2005.
(2) As a percentage of average quarterly assets.
(3) As a percentage of total risk-weighted assets.
A-1
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This section provides an analysis of the Stewardship Financial Corporation's
(the "Corporation") consolidated financial condition and results of operations
for the years ended December 31, 2005, 2004 and 2003. The analysis should be
read in conjunction with the related audited consolidated financial statements
and the accompanying notes presented elsewhere herein.
This annual report contains certain "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, and may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," "plan," "estimate," and "potential." Examples of forward looking
statements include, but are not limited to, estimates with respect to the
financial condition, results of operations and business of the Corporation that
are subject to various factors which could cause actual results to differ
materially from these estimates. These factors include: changes in general,
economic and market conditions, legislative and regulatory conditions, or the
development of an interest rate environment that adversely affects the
Corporation's interest rate spread or other income anticipated from operations
and investments. As used in this annual report, "we" and "us" and "our" refer to
Stewardship Financial Corporation and its consolidated subsidiary, Atlantic
Stewardship Bank, depending on the context.
Introduction
The Corporation, organized in January 1995, as a business corporation under the
laws of the State of New Jersey, was established by the Board of Directors of
Atlantic Stewardship Bank (the "Bank") to become a holding company for the Bank.
The shareholders of the Bank approved the holding company formation at the
annual meeting in 1996. After obtaining approval and submitting appropriate
applications, the Corporation, on November 22, 1996, acquired all of the shares
of the Bank in exchange for its own shares, on a share per share basis. The
Bank, and its subsidiaries, Stewardship Investment Corp. and Stewardship Realty
Corporation LLC, are wholly-owned subsidiaries of the Corporation. The
Corporation also formed a second subsidiary in 2003, Stewardship Statutory Trust
I (the "Trust"). The Trust was formed to issue Trust Preferred Securities to
enhance the capital position of the Corporation. The Trust is not consolidated
with the Corporation's financial statements due to the adoption of Financial
Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003)
"Consolidation of Variable Interest Entities" ("FIN 46R").
The Corporation conducts a general commercial and retail banking business
encompassing a wide range of traditional deposit and lending functions along
with the other customary banking services. Stewardship Investment Corporation is
a wholly-owned nonbank subsidiary of Atlantic Stewardship Bank, whose primary
business is to own and manage the Bank's investment portfolio. Stewardship
Realty Corporation, LLC, a subsidiary of Atlantic Stewardship Bank, was formed
in September 2005 to purchase a property located at 612 Godwin Avenue, Midland
Park, Bergen County, New Jersey. The property, located next to the main office
of the Corporation, will be used for office space for the administrative area of
the bank. The Corporation earns income and generates cash primarily through the
deposit gathering activities of the branch network. These deposits are then
utilized to fund the Corporation's lending and investing activities.
The Corporation is affected by the overall economic conditions in northern New
Jersey, the interest rate and yield curve environment, and the overall national
economy. These factors are relevant because they will affect our ability to
attract specific deposit products, our ability to invest in loan and investment
products, and our ability to earn acceptable profits without incurring increased
risks.
When evaluating the financial condition and operating performance of the
organization, management reviews historical trends and peer comparisons of the
growth of the organization, asset and deposit concentrations, interest margin
analysis, adequacy of loan loss reserve and loan quality performance, adequacy
of capital under current positions as well as to support future expansion,
adequacy of liquidity, and overall quality of earnings performance.
The Corporation has developed a strong deposit base with good franchise value.
One of our challenges is to continue to grow the existing branch levels, explore
new branch opportunities, provide adequate technology enhancements to achieve
efficiencies and provide strong products, and provide the highest level of
customer service.
During 2005, the Corporation relocated its Waldwick branch from a small strip
mall to 64 Franklin Turnpike, a newly renovated Victorian home. This location
provides expanded hours and services such as safe deposit boxes, a two lane
drive-up facility and a drive-up ATM. During the fourth quarter of 2005, the
Corporation developed its tenth branch location at 2 Changebridge Road,
Montville, Morris County, New Jersey. The Branch, which celebrated its grand
opening on February 18th, is operating as a full service facility offering safe
deposit boxes, a two-lane drive-up facility and a drive-up ATM facility.
A-2
Recent Accounting Pronouncements
In November 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments" (FSP FAS 115-1). FSP FAS
115-1 addresses the determination as to whether an investment is considered
impaired, whether that impairment is other than temporary, and the measurement
of an impairment loss. FSP FAS 115-1 requires that (1) for each individual
impaired security, a company assert its ability and intent to hold to recovery
and to designate an expected recovery period in order to avoid recognizing an
impairment charge through earnings; (2) a company need not make such an
assertion for minor impairments caused by changes in interest rate and sector
spreads; (3) the company must recognize an impairment charge on securities
impaired as a result of interest rate and/or sector spreads immediately upon
changing their assertion to an intent to sell such security; and (4) defines
when a change in a company's assertion for one security would not call into
question assertions made for other impaired securities. FSP FAS 115-1 is
effective for other-than-temporary impairment analysis conducted in reporting
periods beginning after December 15, 2005. The Corporation does not expect the
adoption of FSP FAS 115-1 to have a significant impact on its financial
condition or results of operations.
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections" (SFAS No. 154). SFAS No. 154
replaces APB Opinion No. 20, "Accounting Changes", and FASB Statement No. 3,
"Reporting Changes in Interim Financial Statements". SFAS No. 154 carries
forward the guidance contained in Opinion No. 20 for reporting the correction of
an error in previously issued financial statements and a change in accounting
estimate. However, SFAS No. 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. Under this statement, every
voluntary change in accounting principle requires retrospective application to
prior period's financial statements, unless it is impracticable. It also applies
to changes required by an accounting pronouncement in the unusual instance that
the pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions should
be followed. This statement is effective for accounting changes and corrections
made in fiscal years beginning after December 15, 2005, although earlier
application is permitted for changes and corrections made in fiscal years
beginning after June 1, 2005. The Corporation expects no significant effect on
its financial statements as a result of the adoption of this statement.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123R, "Share-Based Payment" (SFAS No. 123R). This statement establishes
standards for accounting for transactions in which a company receives employee
services in exchange for (a) equity instruments of the company or (b)
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the issuance of such equity instruments. SFAS No. 123R
eliminates the ability to account for stock-based compensation using the
intrinsic value-based method of accounting, and requires that such transactions
be recognized as compensation expense in the income statement based on their
fair values on the date of the grant. SFAS No. 123R applies to new awards and to
awards modified, repurchased, or cancelled after January 1, 2006. The transition
methods include modified prospective and modified retrospective adoption
options. Under the modified retrospective option, prior periods may be restated
either as of the beginning of the year of adoption or for all prior periods
presented. The modified prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock at the beginning of
the first quarter of adoption of SFAS No. 123R, while the retroactive methods
record compensation expense for all unvested stock options and restricted stock
beginning in the first period restated. The Corporation will adopt SFAS No. 123R
in the first quarter of 2006 on a modified prospective basis, which will require
recognition of compensation expense for all stock option awards that vest or
become exercisable after the effective date. The impact of adoption of SFAS
No.123R will depend on levels of share-based payments granted in the future.
Critical Accounting Policies And Estimates
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," is based upon the Corporation's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires the Corporation to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses. Note 1 to
the Corporation's Audited Consolidated Financial Statements for the year ended
December 31, 2005 contains a summary of the Corporation's significant accounting
policies. Management believes the Corporation's policy with respect to the
methodology for the determination of the allowance for loan losses involves a
higher degree of complexity and requires management to make difficult and
subjective judgments, which often require assumptions or estimates about highly
uncertain matters. Changes in these judgments, assumptions or estimates could
materially impact results of operations. This critical policy and its
application are periodically reviewed with the Audit Committee and the Board of
Directors.
The allowance for loan losses is based upon management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan
A-3
loss experience, level of delinquencies, detailed analysis of individual loans
for which full collectibility may not be assured, the existence and estimated
net realizable value of any underlying collateral and guarantees securing the
loans, and current economic and market conditions. Although management uses the
best information available, the level of the allowance for loan losses remains
an estimate, which is subject to significant judgment and short-term change.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for loan losses. Such agencies
may require the Corporation to make additional provisions for loan losses based
upon information available to them at the time of their examination.
Furthermore, the majority of the Corporation's loans are secured by real estate
in the State of New Jersey. Accordingly, the collectibility of a substantial
portion of the carrying value of the Corporation's loan portfolio is susceptible
to changes in local market conditions and may be adversely affected should real
estate values decline or the northern New Jersey area experience an adverse
economic shock. Future adjustments to the allowance for loan losses may be
necessary due to economic, operating, regulatory and other conditions beyond the
Corporation's control.
Earnings Summary
The Corporation reported net income of $4.5 million, or $0.94 basic earnings per
share, for the year ended December 31, 2005, an increase of $632,000, or 16.4%,
above the $3.8 million recorded for 2004. Earnings for 2004 had increased
$357,000, or 10.2%, over the 2003 earnings of $3.5 million. Earnings have
increased in both years as a result of increases in net interest income offset
by increases in noninterest expense.
The Federal Reserve began a period of measured increases in interest rates in
June 2004 that continued through December 31, 2005. The targeted federal funds
rate began in 2004 at 1.00% and increased 0.25% at each Federal Open Market
Committee meetings in 2004 and 2005, ending in 2005 at 4.25%. Short-term
interest rates increased as a result of increases by the Federal Reserve, while
market driven longer term interest rates remained mostly unchanged at
historically low levels creating a flat yield curve and pressure on net interest
margins. The Corporation's net interest income increased $1.8 million during
this time period. An increase in the average loan volume partially offset by the
rising costs of deposits and borrowings contributed to this increase.
The return on average assets increased in 2005 to 1.00% from 0.95% in 2004. The
return on average equity increased to 13.86% in 2005 from 13.48% in 2004.
Results of Operations
Net Interest Income
The Corporation's principal source of revenue is the net interest income derived
from the Bank, which represents the difference between the interest earned on
assets and interest paid on funds acquired to support those assets. Net interest
income is affected by the balances and mix of interest-earning assets and
interest-bearing liabilities, changes in their corresponding yields and costs,
and by the volume of interest-earning assets funded by noninterest-bearing
deposits. The Corporation's principal interest-earning assets are loans made to
businesses and individuals and investment securities.
In 2005, net interest income, on a tax equivalent basis, increased to $18.5
million from $16.7 million in 2004, an increase of $1.8 million, or 10.9%. This
was caused by an increase of $8.0 million, or 8.8%, in net average
interest-earning assets (average interest-earning assets less average
interest-bearing liabilities).
Interest income, on a tax equivalent basis, increased $3.7 million, or 17.4%,
during 2005 to $25.2 million from $21.4 million earned during 2004. The increase
was due to an increase in the average volume of interest-earning assets and an
increase in yields on interest-earning assets. Average interest-earning assets
increased $40.8 million in 2005, or 10.6%, over the 2004 amount with average
loans attributing to $40.3 million of the increase due primarily to the
Corporation's competitiveness within the marketplace and the attractive level of
interest rates.
Interest expense increased $1.9 million, or 39.8%, during 2005 to $6.7 million.
The increase was due to an increase in average interest-bearing liabilities of
$32.8 million, or 11.2%, to $325.5 million during 2005. Yields on
interest-bearing liabilities increased to 2.05% during 2005 from 1.63% during
2004. The interest rate environment created a challenging deposit market.
Customers demanded higher interest rates and were attracted to longer term
certificates of deposit. In order to continue to fund strong loan growth, the
Corporation offered several new deposit products to encourage new customers and
retain existing customers. The Ideal Checking product was designed to attract
new demand deposits by offering low balance minimum requirements, one year
service charge free and cash incentives for opening an account, applying for a
debit card, activating bill pay and signing up for auto deposits. A new tiered
product, Sterling Now Account, for customers over 55 was created to provide for
interest bearing checking accounts, free services such as travelers checks and
gift checks, and special interest rates on certificates of deposit accounts and
provides credit for balances maintained in the deposit relationship. The
Corporation also offered a new Power Flex Certificate of Deposit that provided
20 and 30 month terms with a monthly withdrawal or deposit
A-4
feature. This product attributed approximately $30.0 million in new deposit
balances. Despite customer movements to interest bearing deposits, average
noninterest-bearing demand deposits increased $7.6 million, or 9.4%, to $88.5
million during 2005. This helped to maintain a net interest margin of 4.36% in
2005, a slight increase over the 4.35% margin for 2004.
In 2004, net interest income, on a tax equivalent basis, increased to $16.7
million from $14.6 million in 2003, an increase of $2.0 million, or 13.7%.
Interest income, on a tax equivalent basis, increased $2.2 million, or 11.5%,
during 2004 to $21.4 million from $19.2 million earned in 2003. The increase was
due to an increase in the average volume of interest-earning assets partially
offset by a decrease in yields on interest-earning assets. Average
interest-earning assets increased $43.7 million in 2004, or 12.9%, over the 2003
amount. Interest expense increased $194,000 or 4.2%, during 2004. The increase
was due to an increase in average interest-bearing liabilities, partially offset
by a decrease in yields on interest-bearing liabilities. Average
noninterest-bearing demand deposits increased $8.2 million, or 11.3% to $80.9
million during 2004.
The following table reflects the components of the Corporation's net interest
income for the years ended December 31, 2005, 2004 and 2003 including, (1)
average assets, liabilities, and stockholders' equity, (2) interest income
earned on interest-earning assets and interest expense paid on interest-bearing
liabilities, (3) average yields earned on interest-earning assets and average
rates paid on interest-bearing liabilities, and (4) net yield on
interest-earning assets. Nontaxable income from investment securities is
presented on a tax-equivalent basis assuming a statutory tax rate of 34% for
2005, 2004 and 2003. This was accomplished by adjusting this income upward to
make it equivalent to the level of taxable income required to earn the same
amount after taxes.
A-5
2005 2004
---------------------------------- ----------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
--------- --------- ---------- --------- --------- ---------
(Dollars in thousands)
Assets
Interest-earning assets:
Taxable investment securities (1) $ 315,605 $ 20,927 6.63% $ 275,334 $ 17,346 6.30%
Taxable investment securities (1) 81,339 3,130 3.85 84,641 3,101 3.66
Tax-exempt investment
securities (1) (2) ................ 18,998 852 4.48 20,134 952 4.73
Other interest-earning assets ....... 8,200 262 3.20 3,270 48 1.47
--------- --------- --------- ---------
Total interest-earning assets ....... 424,142 25,171 5.93 383,379 21,447 5.59
--------- ---------
Noninterest-earning assets:
Allowance for loan losses ........... (3,600) (3,086)
Other assets ........................ 28,435 24,139
--------- ---------
Total assets ........................ $ 448,977 $ 404,432
========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing
demand deposits ................... $ 134,029 $ 1,531 1.14 $ 122,459 $ 810 0.66%
Savings deposits .................... 48,335 285 0.59 49,432 344 0.70
Certificates of deposit ............. 115,542 3,674 3.18 91,714 2,450 2.67
Repurchase agreements ............... 3,371 98 2.91 2,832 37 1.31
FHLB borrowings ..................... 17,054 614 3.60 19,138 657 3.43
Subordinated debenture .............. 7,217 487 6.75 7,217 487 6.75
--------- --------- --------- ---------
Total interest-bearing
liabilities ....................... 325,548 6,689 2.05 292,792 4,785 1.63
--------- ---------
Noninterest-bearing
liabilities:
Demand deposits ..................... 88,514 80,926
Other liabilities ................... 2,594 2,167
Stockholders' equity ................ 32,321 28,547
--------- ---------
Total liabilities and
stockholders' equity .............. $ 448,977 $ 404,432
========= =========
Net interest income
(taxable equivalent basis) ......... 18,482 16,662
Tax equivalent adjustment ........... (271) (295)
--------- ---------
Net interest income ................. $ 18,211 $ 16,367
========= =========
Net interest spread
(taxable equivalent basis) ......... 3.88% 3.96%
==== ====
Net yield on
interest-earning assets
(taxable equivalent basis) (3) ..... 4.36% 4.35%
==== ====
2003
----------------------------------
Average
Interest Rates
Average Earned/ Income/
Balance Expense Paid
--------- --------- ----------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans (1) ........................... $ 242,530 $ 16,091 6.63%
Taxable investment securities (1) 59,097 1,929 3.26
Tax-exempt investment
securities (1) (2) ................ 20,385 1,051 5.16
Other interest-earning assets ....... 17,680 168 0.95
--------- ---------
Total interest-earning assets ....... 339,692 19,239 5.66
---------
Noninterest-earning assets:
Allowance for loan losses ........... (2,839)
Other assets ........................ 21,816
---------
Total assets ........................ $ 358,669
=========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing
demand deposits ................... $ 115,383 $ 1,058 0.92
Savings deposits .................... 41,767 325 0.78
Certificates of deposit ............. 94,047 2,975 3.16
Repurchase agreements ............... 3,998 57 1.43
FHLB borrowings ..................... 1,041 35 3.36
Subordinated debenture .............. 2,097 141 6.72
--------- ---------
Total interest-bearing
liabilities ....................... 258,333 4,591 1.78
---------
Noninterest-bearing
liabilities:
Demand deposits ..................... 72,687
Other liabilities ................... 2,126
Stockholders' equity ................ 25,523
---------
Total liabilities and
stockholders' equity .............. $ 358,669
=========
Net interest income
(taxable equivalent basis) ......... 14,648
Tax equivalent adjustment ........... (324)
---------
Net interest income ................. $ 14,324
=========
Net interest spread
(taxable equivalent basis) ......... 3.88%
====
Net yield on
interest-earning assets
(taxable equivalent basis) (3) ..... 4.31%
====
- --------------
(1) For purpose of these calculations, nonaccruing loans are included in the
average balance. Fees are included in loan interest. Loans and total
interest-earning assets are net of unearned income. Securities are
included at amortized cost.
(2) The tax equivalent adjustments are based on a marginal tax rate of 34%.
(3) Net interest income (taxable equivalent basis) divided by average
interest-earning assets.
A-6
The following table analyzes net interest income in terms of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
in yields earned and rates paid on such assets and liabilities on a tax
equivalent basis. The table reflects the extent to which changes in the
Corporation's interest income and interest expense are attributable to changes
in volume (changes in volume multiplied by prior year rate) and changes in rate
(changes in rate multiplied by prior year volume). Changes attributable to the
combined impact of volume and rate have been allocated proportionately to
changes due to volume and changes due to rate.
2005 Versus 2004 2004 Versus 2003
-------------------------------- --------------------------------
(In thousands)
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
-------------------- --------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
Interest income:
Loans ................................. $ 2,635 $ 946 $ 3,581 $ 2,096 $ (841) $ 1,255
Taxable investment securities ......... (124) 153 29 913 259 1,172
Tax-exempt investment securities ...... (52) (48) (100) (13) (86) (99)
Other interest-earning assets ......... 120 94 214 (182) 62 (120)
-------- -------- -------- -------- -------- --------
Total interest-earning assets .... 2,579 1,145 3,724 2,814 (606) 2,208
-------- -------- -------- -------- -------- --------
Interest expense:
Interest-bearing demand deposits ...... $ 83 $ 638 $ 721 $ 62 $ (310) $ (248)
Savings deposits ...................... (7) (52) (59) 56 (37) 19
Time deposits ......................... 706 518 1,224 (72) (453) (525)
Repurchase agreements ................. 8 53 61 (16) (4) (20)
FHLB borrowings ....................... (74) 31 (43) 621 1 622
Subordinated debenture ................ -- -- -- 346 -- 346
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 716 1,188 1,904 997 (803) 194
-------- -------- -------- -------- -------- --------
Net change in net interest income ..... $ 1,863 $ (43) $ 1,820 $ 1,817 $ 197 $ 2,014
======== ======== ======== ======== ======== ========
Provision for Loan Losses
The Corporation maintains an allowance for loan losses considered by management
to be adequate to cover the probable losses inherent in its loan portfolio. On
an ongoing basis, management analyzes the adequacy of this allowance by
considering the nature and volume of the Corporation's loan activity, financial
condition of the borrower, fair market value of underlying collateral, and
changes in general market conditions. Additions to the allowance for loan losses
are charged to operations in the appropriate period. Actual loan losses, net of
recoveries, serve to reduce the allowance. The appropriate level of the
allowance for loan losses is based on estimates, and ultimate losses may vary
from current estimates.
The loan loss provision totaled $600,000 in 2005 representing an 11.1% increase
from the 2004 provision of $540,000. The 2004 provision increased 27.1% from the
2003 provision of $425,000. The increases were due to the strong growth in the
loan portfolio experienced in 2005 and 2004.
Noninterest Income
Noninterest income consists of all income other than interest income and is
principally derived from service charges on deposits, gain on sales of mortgage
loans, income derived from bank owned life insurance, fees on safe deposit
boxes, credit card merchant income and income derived from debit cards and ATM
usage.
Noninterest income increased $514,000, or 18.9%, to $3.2 million during the year
ended December 31, 2005, when compared with $2.7 million during the 2004 period.
The increase in noninterest income resulted primarily from an increase of
$104,000 in gain on sales of mortgage loans due to an increase in the volume of
mortgage loans originated for sale. In April, 2005 the Corporation purchased
$8.0 million in Bank-owned life insurance on key management personnel. The
increase in the cash surrender value of the insurance policies was recognized as
income for 2005 in the amount of $210,000. Increases in fees and service charges
on deposit accounts of $186,000 to $2.6 million for the year ended December 31,
2005 were due to an increase in the deposit base and income derived from
merchant card processing.
A-7
Noninterest income decreased by $168,000, or 5.8%, to $2.7 million during the
year ended December 31, 2004, when compared with $2.9 million during the 2003
period. The decrease resulted primarily from a decrease in gains on mortgages
sold, partially offset by an increase in fees and service charges on deposit
accounts and income derived from merchant card processing.
Noninterest Expense
Although management is committed to containing noninterest expense, the
continued growth of the Corporation has caused noninterest expense to increase
by $1.4 million or 10.9%, to $13.9 million for the year ended December 31, 2005,
compared to $12.5 million for the same period in 2004. Salaries and employee
benefits, the major component of noninterest expense, increased $441,000 or
7.8%. The increase was due primarily to general increases for merit and
performance and increases in benefit related expenses. Data processing expense
increased $134,000, or 13.2% due to the overall increase in our deposit base.
Advertising expense increased $137,000 to support the new product offerings and
the 20 year anniversary celebration. Miscellaneous expenses increased $346,000,
or 19.0% as a result of increasing ATM/Debit card expense, general growth of the
Corporation and increases in consulting expense. During 2005, the Corporation
hired an outside consulting firm to work with management in the documentation of
internal controls. This will assist in the future compliance with Section 404 of
the Sarbanes-Oxley Act that requires management to document and assess the
adequacy of internal controls.
In accordance with its By-laws to tithe ten percent (10%) of its pre-tax profits
to various charities, the Corporation had charitable contributions totaling
$689,000 for the year ended December 31, 2005, an increase of $107,000 or 18.4%,
over the same period in 2004.
Noninterest expense increased $1.1 million, or 9.7%, to $12.5 million for the
year ended December 31, 2004, compared to $11.4 million for the same period in
2003. Increases in salaries and employee benefits were primarily a result of
additions to staff for the new branch in Wayne, New Jersey in 2003 and general
merit and salary increases. Occupancy and equipment expense increased $267,000,
or 18.6% primarily due to the increase in branch facilities.
Income Taxes
Income tax expense totaled $2.5 million for the year ended December 31, 2005,
for an effective tax rate of 35.9%, compared to $2.2 million, for an effective
tax rate of 36.4% for the year ended December 31, 2004. The decrease in the
effective tax rate can be attributed to income derived from bank owned life
insurance. Income tax expense totaled $1.9 million for the year ended December
31, 2003, for an effective tax rate of 35.3%.
Financial Condition
Total assets at December 31, 2005 were $482.7 million, an increase of $58.4
million, or 13.8%, over the $424.3 million at December 31, 2004. This increase
in assets reflects, among other things, a $49.1 million increase in net loans
held for portfolio, a $7.7 million increase in securities available for sale,
and an increase of $8.2 million created by the purchase of $8.0 million bank
owned life insurance purchased in April 2005, partially offset by a decrease of
$9.0 million in federal funds sold. The Corporation continued to experience
strong loan origination and redeployed funds out of federal funds sold into the
lending portfolio.
Loan Portfolio
The Corporation's loan portfolio at December 31, 2005, net of allowance for loan
losses, totaled $342.0 million, an increase of $49.1 million, or 16.8%, over the
$292.9 million at December 31, 2004. Commercial real estate mortgage loans
consisting of $163.3 million, or 47.2% of the total portfolio, comprised the
largest portion of the loan portfolio. This represented an increase of $32.5
million from $130.8 million, or 44.1% of the total loan portfolio at December
31, 2004. Commercial loans increased $9.8 million and consumer installment loans
increased $4.3 million. Residential real estate mortgages increased $4.0
million. The Corporation continued its policy of selling the majority of its
fixed rate residential real estate loans in the secondary market.
The Corporation's lending activities are concentrated in loans secured by real
estate located in northern New Jersey and therefore collectibility of the loan
portfolio is susceptible to changes in real estate market conditions in the
northern New Jersey market. The Corporation has not made loans to borrowers
outside the United States.
At December 31, 2005, there were no concentrations of loans exceeding 10% of
total loans outstanding. Loan concentrations are considered to exist when there
are amounts loaned to a multiple number of borrowers engaged in similar
activities which would cause them to be similarly impacted by economic or other
related conditions.
A-8
The following table sets forth the classification of the Corporation's loans by
major category at the end of the last five years:
December 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(In thousands)
Real estate mortgage:
Residential .................. $ 45,604 $ 41,569 $ 44,835 $ 39,705 $ 36,394
Commercial ................... 163,309 130,762 109,708 88,593 72,262
Commercial loans ............... 65,011 55,252 48,950 38,228 32,871
Consumer loans:
Installment (1) .............. 51,540 47,218 41,067 37,293 35,961
Home equity .................. 20,271 21,484 17,181 12,471 7,944
Other ........................ 506 260 238 241 243
-------- -------- -------- -------- --------
Total gross loans .............. 346,241 296,545 261,979 216,531 185,675
Less: Allowance for loan losses 3,847 3,299 2,888 2,689 2,602
Deferred loan fees ....... 418 337 315 263 143
-------- -------- -------- -------- --------
Net loans ...................... $341,976 $292,909 $258,776 $213,579 $182,930
======== ======== ======== ======== ========
- -----------
(1) Includes automobile, home improvement, second mortgages and unsecured
loans.
The following table sets forth certain categories of gross loans as of December
31, 2005 by contractual maturity. Borrowers may have the right to prepay
obligations with or without prepayment penalties. This might cause actual
maturities to differ from the contractual maturities summarized below.
After 1 Year
Within But Within After
1 Year 5 Years 5 Years Total
--------- ------------ --------- ---------
(In thousands)
Real estate mortgage .... $ 23,879 $ 24,692 $ 160,342 $ 208,913
Commercial .............. 31,150 28,199 5,662 65,011
Consumer ................ 1,285 10,943 60,089 72,317
--------- --------- --------- ---------
Total gross loans ....... $ 56,314 $ 63,834 $ 226,093 $ 346,241
========= ========= ========= =========
A-9
The following table sets forth the dollar amount of all gross loans due one year
or more after December 31, 2005, which have predetermined interest rates or
floating or adjustable interest rates:
Floating or
Predetermined Adjustable
Rates Rates Total
------------- ----------- --------
(In thousands)
Real estate mortgage ................... $ 71,430 $113,604 $185,034
Commercial ............................. 20,303 13,558 33,861
Consumer ............................... 46,729 24,303 71,032
-------- -------- --------
$138,462 $151,465 $289,927
======== ======== ========
Asset Quality
The Corporation's principal earning asset is its loan portfolio. Inherent in the
lending function is the risk of deterioration in a borrower's ability to repay
loans under existing loan agreements. Management realizes that because of this
risk, reserves need to be maintained to absorb potential loan losses. In
determining the adequacy of the allowance for loan losses, management of the
Corporation considers the risks inherent in its loan portfolio and changes in
the nature and volume of its loan activities, along with general economic and
real estate market conditions. Although management attempts to establish a
reserve sufficient to offset potential losses in the portfolio, changes in
economic conditions, regulatory policies and borrower's performance could
require future changes to the allowance.
The Corporation utilizes a two tier approach by (1) identifying problem loans
and allocating specific loss allowances on such loans and (2) establishing a
general valuation allowance on the remainder of its loan portfolio. The
Corporation maintains a loan review system that allows for a periodic review of
its loan portfolio and the early identification of potential problem loans. Such
a system takes into consideration, among other things, delinquency status, size
of loans, type of collateral and financial condition of the borrowers.
Allocations of specific loan loss allowances are established for identified
loans based on a review of such information and/or appraisals of underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loss experience, composition of loan
portfolio, current economic conditions and management's judgment.
The Corporation's accounting policies are set forth in Note 1 to the audited
financial statements. The application of certain of these policies requires
significant management judgment and the utilization of estimates. Actual results
could differ from these judgments and estimates resulting in a significant
impact on the financial statements. A critical accounting policy for the
Corporation is the policy utilized in determining the adequacy of the allowance
for loan losses. Although management uses the best information available, the
level of the allowance for loan losses remains an estimate which is subject to
significant judgment and short-term change. Various regulatory agencies, as an
integral part of their examination process, periodically review the
Corporation's allowance for loan losses. Such agencies may require the
Corporation to make additional provisions for loan losses based upon information
available to them at the time of their examination. Furthermore, the majority of
the Corporation's loans are secured by real estate in the State of New Jersey.
Accordingly, the collectibility of a substantial portion of the carrying value
of the Corporation's loan portfolio is susceptible to changes in the local
market conditions and may be adversely affected should real estate values
decline or the northern New Jersey area experience an adverse economic shock.
Future adjustments to the allowance may be necessary due to economic, operating,
regulatory, and other conditions beyond the Corporation's control. The allowance
for loan losses represents 1.11% of total loans, or 7.3 times non-performing
loans at December 31, 2005, compared with 1.11% of total loans or 2.3 times
non-performing loans at December 31, 2004. The allowance for loan loss to
nonperforming loans increased from 2004 to 2005 due to the decrease in
nonperforming loans. In management's opinion, the allowance for loan losses
totaling $3.8 million is adequate to cover losses inherent in the portfolio at
December 31, 2005.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, restructured loans, loans past
due 90 days or more and accruing, and other real estate owned. The Corporation's
loans are generally placed in a nonaccrual status when they become past due in
excess of 90 days as to payment of principal and interest. Interest previously
accrued on these loans and not yet paid is charged against income during the
current period. Interest earned thereafter is only included in income to the
extent that it is received in cash. Loans past due 90 days or more and accruing
represent those loans which are sufficiently collateralized and management
believes all interest and principal owed will be collected. Restructured loans
are loans that have been renegotiated to permit a borrower, who has incurred
adverse financial circumstances, to continue to perform. Management can reduce
the contractual interest rates to below market rates or make significant
concessions to the terms of the loan in order for the borrower to continue to
make payments.
A-10
The following table sets forth certain information regarding the Corporation's
nonperforming assets as of December 31 for each of the preceding five years:
December 31,
----------------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(Dollars in thousands)
Nonaccrual loans: (1)
Commercial real estate ........................... $ 122 $ 56 $ 83 $ 80 $ 77
Commercial ....................................... 92 159 163 326 --
Consumer ......................................... 258 47 11 89 86
------ ------ ------ ------ ------
Total nonaccrual loans ........................ 472 262 257 495 163
------ ------ ------ ------ ------
Loans past due ninety days or more and accruing: (2)
Construction ..................................... -- 940 -- -- --
Commercial ....................................... -- -- 314 -- 14
Consumer ......................................... 55 7 6 4 8
------ ------ ------ ------ ------
Total loans past due ninety days or more and
accruing ................................... 55 947 320 4 22
------ ------ ------ ------ ------
Restructured loans:
Commercial ....................................... -- -- 269 451 357
Consumer ......................................... -- 215 244 397 430
------ ------ ------ ------ ------
Total restructured loans ...................... -- 215 513 848 787
------ ------ ------ ------ ------
Total nonperforming loans .......................... $ 527 $1,424 $1,090 $1,347 $ 972
====== ====== ====== ====== ======
Nonaccrual loans to total gross loans .............. 0.14% 0.09% 0.10% 0.23% 0.09%
Nonperforming loans to total gross loans ........... 0.15% 0.48% 0.42% 0.62% 0.52%
Nonperforming loans to total assets ................ 0.11% 0.34% 0.27% 0.41% 0.35%
Allowance for loan losses to nonperforming loans ... 729.98% 231.67% 264.95% 199.63% 267.70%
- ---------------
(1) Restructured loans classified as nonaccrual for the years ended December
31, 2005 and 2004 were $152,000 and $162,000, respectively.
(2) There were no restructured loans classified as loans past due ninety days
or more and accruing at December 31, 2005 and 2004. Restructured loans
classified as loans past due ninety days or more and accruing at December
31, 2003 totaled $150,000.
There were no loans, other than those included in the above table, where the
Corporation was aware of any credit conditions of any borrowers that would
indicate a strong possibility of the borrowers not complying with the present
terms and conditions of repayment and which may result in such loans being
included as nonaccrual, past due or restructured at a future date.
A-11
The following table sets forth, for the years ended December 31, 2005, 2004,
2003, 2002 and 2001, the historical relationships among the amount of loans
outstanding, the allowance for loan losses, the provision for loan losses, the
amount of loans charged off and the amount of loan recoveries:
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period ......................... $3,299 $2,888 $2,689 $2,602 $2,223
Loans charged off:
Commercial ........................................... -- 49 173 65 --
Consumer ............................................. 57 92 56 25 49
------ ------ ------ ------ ------
Total loans charged off ........................... 57 141 229 90 49
------ ------ ------ ------ ------
Recoveries of loans previously charged off:
Commercial ........................................... -- 3 1 9 5
Consumer ............................................. 5 9 2 8 3
------ ------ ------ ------ ------
Total recoveries of loans previously charged off . 5 12 3 17 8
------ ------ ------ ------ ------
Net loans charged off .................................. 52 129 226 73 41
Provisions charged to operations ....................... 600 540 425 160 420
------ ------ ------ ------ ------
Balance at end of period ............................... $3,847 $3,299 $2,888 $2,689 $2,602
====== ====== ====== ====== ======
Net charge offs during the period to average
loans outstanding during the period .................. 0.02% 0.05% 0.10% 0.04% 0.02%
====== ====== ====== ====== ======
Balance of allowance for loan losses at the
end of year to gross year end loans .................. 1.11% 1.11% 1.10% 1.24% 1.40%
====== ====== ====== ====== ======
The following table sets forth the allocation of the allowance for loan losses
at the dates indicated by category loans:
2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------
Percent to Percent to Percent to Percent to Percent to
Amount Total(1) Amount Total(1) Amount Total(1) Amount Total(1) Amount Total(1)
----------------- ----------------- ----------------- ----------------- -----------------
(Dollars in thousands)
Real estate - residential ........ $ 320 13.2% $ 297 14.0% $ 306 17.1% $ 289 18.3% $ 316 19.6%
Real estate - commercial ......... 1,562 47.1% 1,272 44.1% 1,038 41.9% 911 40.9% 857 38.9%
Commercial ....................... 1,192 18.8% 979 18.6% 910 18.7% 906 17.7% 849 17.7%
Consumer ......................... 773 20.9% 751 23.3% 634 22.3% 583 23.1% 580 23.8%
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Total allowance for loan losses $3,847 100.0% $3,299 100.0% $2,888 100.0% $2,689 100.0% $2,602 100.0%
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
(1) Represents percentage of loan balance in category to total gross loans.
Investment Portfolio
The Corporation maintains an investment portfolio to enhance its yields and to
provide a secondary source of liquidity. The portfolio is comprised of U.S.
Treasury securities, U.S. government and agency obligations, mortgage-backed
securities, and state and political subdivision obligations and has been
classified as held to maturity or available for sale. Investments in debt
securities that the Corporation has the positive intent and the ability to hold
to maturity are classified as held to maturity securities and reported at
amortized cost. All other securities are classified as available for sale
securities and reported at fair value, with unrealized holding gains or losses
reported in a separate component of stockholders' equity. Securities in the
available for sale category may be held for indefinite periods of time and
include securities that management intends to use as part of its Asset/Liability
strategy or that may be sold in response to changes in interest rates, changes
in prepayment risks, the need to provide liquidity, the need to increase
regulatory capital or similar factors. Securities available for sale increased
to $64.1 million at December 31, 2005, from $56.5 million at December 31, 2004,
an increase of $7.7 million, or 13.5%. Securities held to maturity decreased
$2.3 million, or 5.7%, to $37.8 million at December 31, 2005 from $40.1 million
at December 31, 2004.
A-12
The following table sets forth the classification of the Corporation's
investment securities by major category at the end of the last three years:
December 31,
------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Securities available for sale:
U.S. Treasury ................... $ 496 0.8% $ 495 0.9% $ 500 0.8%
U.S. government
sponsored agencies ........... 32,478 50.6% 23,344 41.3% 22,144 36.1%
Obligations of state and
political subdivisions ....... 2,031 3.2% 1,915 3.4% 1,406 2.3%
Mortgage-backed securities ...... 28,111 43.8% 29,730 52.6% 37,255 60.8%
Community Reinvestment Act Fund . 1,051 1.6% 1,030 1.8% -- --
--------- --------- --------- --------- --------- ---------
Total ............................. $ 64,167 100.0% $ 56,514 100.0% $ 61,305 100.0%
========= ========= ========= ========= ========= =========
Securities held to maturity:
U.S. Treasury ................... $ 1,004 2.7% $ 1,007 2.5% $ 1,011 1.9%
U.S. government
sponsored agencies ........... 12,113 32.0% 8,655 21.6% 12,756 24.4%
Obligations of state and
political subdivisions ....... 15,747 41.6% 17,688 44.1% 19,686 37.6%
Mortgage-backed securities ...... 8,953 23.7% 12,761 31.8% 18,907 36.1%
--------- --------- --------- --------- --------- ---------
Total ............................. $ 37,817 100.0% $ 40,111 100.0% $ 52,360 100.0%
========= ========= ========= ========= ========= =========
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of stated yields to maturity, considering
applicable premium or discount) of the Corporation's securities available for
sale as of December 31, 2005. Issuers may have the right to call or prepay
obligations with or without call or prepayment penalties. This might cause
actual maturities to differ from contractual maturities.
After 1 Year After 5 Years
Within But Within But Within After
1 Year 5 Years 10 Years 10 Years Total
----------- ------------ ------------- ----------- -----------
(Dollars in thousands)
U.S. Treasury :
Carrying value ................................ $ 496 $ -- $ -- $ -- $ 496
Yield ......................................... 1.61% -- -- -- 1.61%
U.S. government sponsored agencies :
Carrying value ................................ 5,043 26,456 979 -- 32,478
Yield ......................................... 2.13% 3.74% 4.97% -- 3.53%
Obligations of state and political subdivisions:
Carrying value ................................ 694 1,032 305 -- 2,031
Yield ......................................... 1.29% 2.02% 3.26% -- 1.96%
Mortgage-backed securities :
Carrying value ................................ -- 1,933 7,138 19,040 28,111
Yield ......................................... -- 3.82% 4.10% 4.88% 4.61%
Community Reinvestment Act Fund:
Carrying value ................................. 1,051 -- -- -- 1,051
Yield .......................................... 3.97% -- -- -- 3.97%
----------- ----------- ----------- ----------- -----------
Total carrying value ............................ $ 7,284 $ 29,421 $ 8,422 $ 19,040 $ 64,167
=========== =========== =========== =========== ===========
Weighted average yield .......................... 2.28% 3.68% 4.17% 4.88% 3.94%
=========== =========== =========== =========== ===========
A-13
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of stated yields to maturity, considering
applicable premium or discount) of the Corporation's securities held to maturity
as of December 31, 2005. Issuers may have the right to call or prepay
obligations with or without call or prepayment penalties. This might cause
actual maturities to differ from contractual maturities.
After 1 Year After 5 Years
Within But Within But Within After
1 Year 5 Years 10 Years 10 Years Total
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
U.S. Treasury :
Carrying value ................................ $ 502 $ 502 $ -- $ -- $ 1,004
Yield ......................................... 4.00% 4.57% -- -- 4.29%
U.S. government sponsored agencies :
Carrying value ................................ 5,211 5,902 1,000 -- 12,113
Yield ......................................... 2.70% 3.93% 5.13% -- 3.50%
Obligations of state and political subdivisions :
Carrying value ................................ 6,078 8,439 903 327 15,747
Yield ......................................... 3.15% 3.09% 2.85% 2.60% 3.09%
Mortgage-backed securities :
Carrying value ................................ -- 917 1,720 6,316 8,953
Yield ......................................... -- 4.38% 5.02% 5.10% 5.01%
----------- ----------- ----------- ----------- -----------
Total carrying value ............................ $ 11,791 $ 15,760 $ 3,623 $ 6,643 $ 37,817
=========== =========== =========== =========== ===========
Weighted average yield .......................... 2.99% 3.53% 4.51% 4.98% 3.71%
=========== =========== =========== =========== ===========
Deposits
The Corporation's deposits at December 31, 2005 totaled $404.1 million, an
increase of $47.2 million, or 13.2%, over the comparable period of 2004, when
deposits totaled $356.9 million. The Corporation relied on its existing market
area and current competitive products and services to provide growth during
2005. The economic and interest rate environment made it difficult to attract
core deposits. New deposit products as discussed earlier provided for much of
the success in deposit growth in 2005.
The following table sets forth the classification of the Corporation's deposits
by major category as of December 31 for each of the preceding years:
December 31,
------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Noninterest-bearing demand $ 93,924 23.2% $ 90,241 25.3% $ 80,845 23.7%
Interest-bearing demand .. 122,906 30.5% 124,185 34.8% 119,663 35.0%
Saving deposits .......... 45,780 11.3% 49,966 14.0% 45,051 13.2%
Certificates of deposit .. 141,518 35.0% 92,526 25.9% 95,979 28.1%
-------- -------- -------- -------- -------- --------
Total .................... $404,128 100.0% $356,918 100.0% $341,538 100.0%
======== ======== ======== ======== ======== ========
As of December 31, 2005, the aggregate amount of outstanding certificates of
deposit issued in amounts of $100,000 or more, broken down by time remaining to
maturity, was as follows (in thousands):
Three months or less .................. $ 8,146
Four months through six months ........ 3,208
Seven months through twelve months .... 6,602
Over twelve months .................... 44,387
-------
Total ............................ $62,343
=======
A-14
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Corporation's market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities. Management actively monitors and
manages its interest rate risk exposure.
The Corporation's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase or decrease in interest rates may adversely
impact the Corporation's earnings to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis. The Corporation monitors the impact of changes in interest
rates on its net interest income using several tools. One measure of the
Corporation's exposure to differential changes in interest rates between assets
and liabilities is shown in the Corporation's Maturity and Repricing Analysis
under the Interest Rate Sensitivity caption below.
The Corporation's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Corporation's
net interest income and capital, while maintaining the asset-liability structure
to obtain the maximum yield-cost spread on that structure. The Corporation
relies primarily on its asset-liability structure to control interest rate risk.
The Corporation continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost effective,
and therefore, has focused its efforts on increasing the Corporation's
yield-cost spread through retail growth opportunities.
The following table shows the Corporation's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 2005. Market rate sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments. Expected maturities are contractual maturities
adjusted for projected payments of principal. The actual maturities of these
instruments could vary substantially if future prepayments differ from the
projections. For non-maturity deposit liabilities, in accordance with standard
industry practice, "decay factors" were used to estimate deposit runoff.
Average
Interest Fair
Rate 2006 2007 2008 2009 2010 Thereafter Total Value
-------- -------- --------- -------- -------- --------- ---------- -------- --------
(Dollars in thousands)
Interest-Sensitive Assets:
Interest-bearing due from banks 3.86% 870 -- -- -- -- -- 870 870
Loans:
Real estate mortgage ........ 6.61% 32,953 24,107 11,750 11,336 10,225 118,542 208,913 208,800
Commercial .................. 7.74% 35,856 8,661 9,433 3,810 4,490 2,761 65,011 65,138
Consumer .................... 6.41% 10,817 6,061 5,660 5,468 5,855 38,456 72,317 71,500
Mortgage loans held for sale ... 5.68% 2,041 -- -- -- -- -- 2,041 2,041
Investment securities (1) ...... 3.84% 54,474 19,429 15,554 7,996 2,277 4,193 103,923 103,581
-------- -------- --------- -------- -------- --------- -------- -------- --------
6.10% 137,011 58,258 42,397 28,610 22,847 163,952 453,075 451,930
------------------- --------- -------- -------- --------- -------- -------- --------
Interest-Sensitive Liabilities:
Savings ........................ 0.58% 9,374 9,124 9,124 9,124 9,034 -- 45,780 45,780
Interest-bearing ............... 1.20% 24,660 24,623 24,623 24,623 24,377 -- 122,906 122,906
Time deposits .................. 3.59% 47,759 68,706 16,244 6,351 1,142 1,316 141,518 141,783
Securites sold under agreement
to repurchase ............... 3.48% 4,731 -- -- -- -- -- 4,731 4,730
FHLB borrowings ................ 3.99% 16,352 984 1,016 1,050 1,084 10,000 30,486 34,374
Subordinated debentures ........ 6.75% -- -- -- -- -- 7,217 7,217 7,731
-------- -------- --------- -------- -------- --------- -------- -------- --------
2.46% 102,876 103,437 51,007 41,148 35,637 18,533 352,638 357,304
-------- --------- -------- -------- --------- -------- -------- --------
Net Interest-Sensitive
Assets (Liabilities) ........... $ 34,135 $ (45,179) $ (8,610) $(12,538) $ (12,790) $145,419 $100,437 $ 94,626
======== ========= ======== ======== ========= ======== ======== ========
- ------------
(1) Includes securities held to maturity, securities available for sale and
FHLB-NY stock.
A-15
Interest Rate Sensitivity
Interest rate movements and deregulation of interest rates have made managing
the Corporation's interest rate sensitivity increasingly important. The
Corporation attempts to maintain stable net interest margins by generally
matching the volume of assets and liabilities maturing, or subject to repricing,
by adjusting interest rates to market conditions, and by developing new
products. One method of measuring the Corporation's exposure to changes in
interest rates is the maturity and repricing gap analysis. The difference
between the volume of assets and liabilities that reprice in a given period is
the interest sensitivity gap. A "positive" gap results when more assets than
liabilities mature or are subject to repricing in a given time frame.
Conversely, a "negative" gap results when there are more liabilities than assets
maturing or are subject to repricing in a given period of time. The smaller the
gap, the less the effect of the market volatility on net interest income. During
a period of rising interest rates, an institution with a negative gap position
would not be in as favorable a position, as compared to an institution with a
positive gap, to invest in higher yielding assets. This may result in yields on
its assets increasing at a slower rate than the increase in its costs of
interest-bearing liabilities than if it had a positive gap. During a period of
falling interest rates, an institution with a negative gap would experience a
repricing of its assets at a slower rate than its interest-bearing liabilities,
which consequently may result in its net interest income growing at a faster
rate than an institution with a positive gap position.
The following table sets forth estimated maturity/repricing structure of the
Corporation's interest-earning assets and interest-bearing liabilities as of
December 31, 2005. The amounts of assets or liabilities shown which reprice or
mature during a particular period were determined in accordance with the
contractual terms of each asset or liability and adjusted for prepayment
assumptions where applicable. The table does not necessarily indicate the impact
of general interest rate movements on the Corporation's net interest income
because the repricing of certain categories of assets and liabilities, for
example, prepayments of loans and withdrawal of deposits, is beyond the
Corporation's control. As a result, certain assets and liabilities indicated as
repricing within a period may in fact reprice at different times and at
different rate levels.
More than
Three Months
Three Months Through After Noninterest
or Less One Year One Year Sensitive Total
------------ ------------ --------- ----------- ---------
(Dollars in thousands)
Assets:
Loans:
Real estate mortgage ....... $ 13,296 $ 21,956 $ 173,661 $ -- $ 208,913
Commercial ................. 10,494 25,902 28,615 -- 65,011
Consumer ................... 23,283 6,320 42,714 -- 72,317
Mortgage loans held for sale .. 2,041 -- -- -- 2,041
Investment securities (1) ..... 27,596 29,281 47,046 -- 103,923
Federal funds sold ............ -- -- -- -- --
Other assets .................. 3,982 -- -- 26,540 30,522
--------- --------- --------- --------- ---------
Total assets ........... $ 80,692 $ 83,459 $ 292,036 $ 26,540 $ 482,727
--------- --------- --------- --------- ---------
Source of funds:
Savings ....................... $ -- $ 45,780 $ -- $ -- $ 45,780
Interest-bearing .............. 122,906 -- -- -- 122,906
Certificates of deposit ....... 15,588 33,487 92,443 -- 141,518
Repurchasing agreements ....... 4,009 722 -- -- 4,731
Borrowings .................... 15,635 717 14,134 -- 30,486
Subordinated debenture ........ -- -- 7,217 -- 7,217
Other liabilities ............. -- -- -- 96,705 96,705
Stockholders' equity .......... -- -- -- 33,384 33,384
--------- --------- --------- --------- ---------
Total source of funds .. $ 158,138 $ 80,706 $ 113,794 $ 130,089 $ 482,727
--------- --------- --------- --------- ---------
Interest rate sensitivity gap ... $ (77,446) $ 2,753 $ 178,242 $(103,549)
========= ========= ========= =========
Cumulative interest rate
sensitivity gap ............... $ (77,446) $ (74,693) $ 103,549 $ --
========= ========= ========= =========
Ratio of GAP to total assets .... -16.0% 0.6% 36.9% -21.5%
========= ========= ========= =========
Ratio of cumulative GAP assets to
total assets .................. -16.0% -15.4% 21.5% --
========= ========= ========= =========
- ----------
(1) Includes securities held to maturity, securities available for sale and
FHLB-NY stock.
A-16
The Corporation also uses a simulation model to analyze the sensitivity of net
interest income to movements in interest rates. The simulation model projects
net interest income, net income, net interest margin, and capital to asset
ratios based on various interest rate scenarios over a twelve month period. The
model is based on the actual maturity and repricing characteristics of all rate
sensitive assets and liabilities. Management incorporates into the model certain
assumptions regarding prepayments of certain assets and liabilities. The model
assumes an immediate rate shock to interest rates without management's ability
to proactively change the mix of assets or liabilities. According to the reports
generated for year end 2005, an immediate interest rate increase of 200 basis
points resulted in a decrease in net interest income of 9.3%, or $1.9 million,
while an immediate interest rate decrease of 200 basis points resulted in an
decrease in net interest income of 0.5% or $109,000. Management has a goal to
maintain a percentage change of no more than 15% given a 200 basis point change
in interest rates. Management cannot provide any assurance about the actual
effect of changes in interest rates on the Corporation's net interest income.
Assumptions have been built into the model for prepayments for assets and decay
rates for nonmaturity deposits such as savings and interest bearing demand.
Liquidity
The Corporation's primary sources of funds are deposits, amortization and
prepayments of loans and mortgage-backed securities, maturities of investment
securities and funds provided by operations. While scheduled loan and
mortgage-backed securities amortization and maturities of investment securities
are a relatively predictable source of funds, deposit flow and prepayments on
loans and mortgage-backed securities are greatly influenced by market interest
rates, economic conditions and competition.
The Corporation's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. These activities
are summarized below:
Years Ended December 31,
-----------------------------------
2005 2004 2003
-------- -------- --------
(In thousands)
Cash and cash equivalents - beginning ................ $ 24,792 $ 19,138 $ 33,418
Operating activities:
Net income ......................................... 4,480 3,848 3,491
Adjustments to reconcile net income
to net cash provided by operating
activities ...................................... (850) 2,160 2,582
-------- -------- --------
Net cash provided by operating activities ............ 3,630 6,008 6,073
Net cash used in investing activities ................ (68,435) (19,182) (87,362)
Net cash provided by financing activities ............ 54,041 18,828 67,009
-------- -------- --------
Net (decrease) increase in cash and cash equivalents . (10,764) 5,654 (14,280)
-------- -------- --------
Cash and cash equivalents - ending ................... $ 14,028 $ 24,792 $ 19,138
======== ======== ========
Cash was generated by operating activities in each of the above periods. The
primary source of cash from operating activities during each period was net
income.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments,
such as federal funds sold.
The Corporation enters into commitments to extend credit, such as letters of
credit, which are not reflected in the consolidated financial statements.
A-17
The Corporation has various contractual obligations that may require future cash
payments. The following table summarizes the Corporation's contractual
obligations at December 31, 2005 and the effect such obligations are expected to
have on our liquidity and cash flows in future periods.
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
-------- -------- -------- -------- --------
(In thousands)
Contractual obligations
Operating lease obligations .................. $ 5,099 $ 500 $ 952 $ 803 $ 2,844
-------- -------- -------- -------- --------
Total contracted cost obligations .............. $ 5,099 $ 500 $ 952 $ 803 $ 2,844
======== ======== ======== ======== ========
Other long-term liabilities/long-term debt
Time deposits ................................ $141,518 $ 49,075 $ 84,950 $ 7,493 $ --
Federal Home Loan Bank advances .............. 30,486 15,400 5,086 -- 10,000
Subordinated debentures ...................... 7,217 -- -- -- 7,217
-------- -------- -------- -------- --------
Total other long-term liabilities/long-term debt $179,221 $ 64,475 $ 90,036 $ 7,493 $ 17,217
======== ======== ======== ======== ========
Other commitments - off balance sheet
Letter of credit ............................. $ 1,841 $ 1,481 $ 321 $ 39 $ --
Other commitments - off balance sheet ........ 28,937 28,937 -- -- --
Unused lines of credit ....................... 92,626 92,626 -- -- --
-------- -------- -------- -------- --------
Total off balance sheet arrangements and
contractual obligations ...................... $123,404 $123,044 $ 321 $ 39 $ --
======== ======== ======== ======== ========
- --------------------
For further information, see Note 16 of Notes to Consolidated Financial
Statements.
Management believes that a significant portion of the certificates of deposit
will remain with the Corporation. In addition, management does not believe that
all of the unused lines of credit will be exercised. The Corporation anticipates
that it will have sufficient funds available to meet its current contractual
commitments. Should the Corporation need temporary funding, the Corporation has
an overnight line of credit with the FHLB-NY for a maximum amount of $41.6
million.
Capital
The Corporation is subject to capital adequacy guidelines promulgated by the
Board of Governors of the Federal Reserve System ("FRB"). The FRB has issued
regulations to define the adequacy of capital based upon the sensitivity of
assets and off-balance sheet exposures to risk factors. Four categories of risk
weights (0%, 20%, 50% and 100%) were established to be applied to different
types of balance sheet assets and off-balance sheet exposures. The aggregate of
the risk weighted items (risk-based assets) is the denominator of the ratio, the
numerator is risk-based capital. Under the regulations, risk-based capital has
been classified into two categories. Tier 1 capital includes common and
qualifying perpetual preferred stockholders' equity less goodwill. Tier 2
capital includes mandatory convertible debt, allowance for loan losses, subject
to certain limitations, and certain subordinated and term debt securities. Total
qualifying capital consists of Tier 1 capital and Tier 2 capital; however, the
amount of Tier 2 capital may not exceed the amount of Tier 1 capital. The FRB
has also issued leverage capital adequacy standards. Under these standards, in
addition to the risk-based capital ratios, a corporation must also compute a
ratio of Tier 1 capital (using the risk-based capital definition) to total
quarterly average assets. The following table reflects the Corporation's capital
ratios at December 31, 2005. The Bank Federal regulator has promulgated
substantially similar capital regulations applicable to the Bank.
Required Actual Excess
-------- ------ ------
Risk-based capital:
Tier 1 .................. 4.00% 11.16% 7.16%
Total ................... 8.00% 12.21% 4.21%
Leverage ratio* ......... 4.00% 8.71% 4.71%
- ----------------
* The minimum leverage ratio set by the FRB is 3.00%. Institutions, which
are not "top-rated", will be expected to maintain a ratio of approximately
100 to 200 basis points above this ratio.
A-18
[LETTERHEAD OF KPMG]
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Stewardship Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Stewardship Financial Corporation and subsidiary as of December 31, 2005 and
2004, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stewardship
Financial Corporation and subsidiary as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
Short Hills, New Jersey
March 29, 2006
A-19
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
December 31,
-------------------------------
2005 2004
-------------------------------
Assets
Cash and due from banks (note 2) ................................. $ 13,158,000 $ 15,297,000
Other interest-earning assets .................................... 870,000 495,000
Federal funds sold ............................................... -- 9,000,000
-------------------------------
Cash and cash equivalents ..................................... 14,028,000 24,792,000
Securities available for sale (notes 3 and 9) .................... 64,167,000 56,514,000
Securities held to maturity estimated fair value
of $37,475,000 (2005) and $40,501,000 (2004) (notes 4 and 9) .. 37,817,000 40,111,000
FHLB-NY stock, at cost ........................................... 1,939,000 1,643,000
Loans, net of allowance for loan losses of $3,847,000 (2005)
and $3,299,000 (2004) (notes 5 and 6) ......................... 341,976,000 292,909,000
Mortgage loans held for sale ..................................... 2,041,000 228,000
Premises and equipment, net (note 7) ............................. 6,464,000 3,433,000
Accrued interest receivable ...................................... 2,432,000 1,922,000
Intangible assets, net of accumulated amortization of $610,000 and
$571,000 at December 31, 2005 and 2004 respectively ........... 140,000 179,000
Bank owned life insurance ........................................ 8,210,000 --
Other assets (note 15) ........................................... 3,513,000 2,575,000
-------------------------------
Total assets ............................................ $ 482,727,000 $ 424,306,000
===============================
Liabilities and Stockholders' equity
Liabilities
Deposits: (note 8)
Noninterest-bearing ........................................... $ 93,924,000 $ 90,241,000
Interest-bearing .............................................. 310,204,000 266,677,000
-------------------------------
Total deposits .......................................... 404,128,000 356,918,000
Other borrowings (note 9) ........................................ 30,486,000 24,129,000
Subordinated debenture (note 10) ................................. 7,217,000 7,217,000
Securities sold under agreements to repurchase (note 9) .......... 4,731,000 3,370,000
Accrued expenses and other liabilities ........................... 2,781,000 2,212,000
-------------------------------
Total liabilities ....................................... 449,343,000 393,846,000
-------------------------------
Commitments and contingencies (note 16) .......................... -- --
Stockholders' equity (notes 11 and 17)
Common stock, no par value 10,000,000 shares authorized
4,787,889 and 4,499,644 shares issued and outstanding at
December 31, 2005 and 2004, respectively ...................... 28,211,000 23,893,000
Treasury stock, 39,581 shares outstanding at December 31, 2005 ... (556,000) --
Retained earnings ................................................ 6,647,000 6,746,000
Accumulated other comprehensive income, net ...................... (918,000) (179,000)
-------------------------------
Total Stockholders' equity ................................. 33,384,000 30,460,000
-------------------------------
Total liabilities and Stockholders' equity ................. $ 482,727,000 $ 424,306,000
===============================
See accompanying notes to consolidated financial statements.
A-20
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
Years Ended December 31,
---------------------------------------------
2005 2004 2003
---------------------------------------------
Interest income:
Loans ............................................... $ 20,927,000 $ 17,346,000 $ 16,091,000
Securities held to maturity:
Taxable .......................................... 923,000 1,011,000 1,248,000
Nontaxable ....................................... 546,000 622,000 700,000
Securities available for sale
Taxable .......................................... 2,207,000 2,090,000 680,000
Nontaxable ....................................... 35,000 35,000 28,000
Other interest--earning assets ...................... 262,000 48,000 168,000
---------------------------------------------
Total interest income ..................... 24,900,000 21,152,000 18,915,000
---------------------------------------------
Interest expense:
Deposits (note 8) ................................... 5,490,000 3,604,000 4,358,000
Borrowed money ...................................... 1,199,000 1,181,000 233,000
---------------------------------------------
Total interest expense .................... 6,689,000 4,785,000 4,591,000
---------------------------------------------
Net interest income before provision for loan losses 18,211,000 16,367,000 14,324,000
Provision for loan losses (note 5) .................. 600,000 540,000 425,000
---------------------------------------------
Net interest income after provision for loan losses . 17,611,000 15,827,000 13,899,000
---------------------------------------------
Noninterest income:
Fees and service charges ............................ 2,558,000 2,372,000 2,106,000
Bank owned life insurance ........................... 210,000 -- --
(Loss)/gain on calls and sales of securities,
net (notes 3 and 4) ............................. -- (3,000) 49,000
Gain on sales of mortgage loans ..................... 239,000 135,000 451,000
Miscellaneous ....................................... 233,000 222,000 288,000
---------------------------------------------
Total noninterest income .................. 3,240,000 2,726,000 2,894,000
---------------------------------------------
Noninterest expense:
Salaries and employee benefits (note 12) ............ 6,080,000 5,639,000 5,377,000
Occupancy, net (note 16) ............................ 1,010,000 969,000 758,000
Equipment ........................................... 728,000 736,000 680,000
Data processing ..................................... 1,150,000 1,016,000 918,000
Advertising ......................................... 422,000 285,000 270,000
FDIC insurance premium .............................. 49,000 49,000 48,000
Amortization of intangible assets ................... 39,000 41,000 44,000
Charitable contributions ............................ 689,000 582,000 512,000
Stationery and supplies ............................. 263,000 239,000 241,000
Merchant processing ................................. 813,000 712,000 541,000
Bank-card related services .......................... 454,000 409,000 327,000
Miscellaneous ....................................... 2,170,000 1,824,000 1,678,000
---------------------------------------------
Total noninterest expenses ................ 13,867,000 12,501,000 11,394,000
---------------------------------------------
Income before income tax expense .................... 6,984,000 6,052,000 5,399,000
Income tax expense (note 15) ........................ 2,504,000 2,204,000 1,908,000
---------------------------------------------
Net income .......................................... $ 4,480,000 $ 3,848,000 $ 3,491,000
=============================================
Basic earnings per share (note 14) .................. $ 0.94 $ 0.82 $ 0.76
=============================================
Diluted earnings per share (note 14) ................ $ 0.93 $ 0.81 $ 0.75
=============================================
Cash dividends per share ............................ $ 0.26 $ 0.22 $ 0.18
=============================================
Weighted average number of common shares
outstanding (note 14) ........................... 4,753,253 4,677,525 4,616,452
=============================================
Weighted average number of diluted common
shares outstanding (note 14) ..................... 4,809,227 4,745,090 4,682,034
=============================================
See accompanying notes to consolidated financial statements.
A-21
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2005, 2004, and 2003
-------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Treasury Stock Comprehensive
---------------------- Retained ------------------- Income/(Loss),
Shares Amount Earnings Shares Amount Net Total
-------------------------------------------------------------------------------------
Balance -- December 31, 2002 .............. 4,106,227 $15,058,000 $ 8,600,000 -- $ -- $ 159,000 $ 23,817,000
Cash dividends paid ($0.18 per share) ... -- -- (817,000) -- -- -- (817,000)
5% Stock dividend ....................... 150,162 3,679,000 (3,681,000) -- -- -- (2,000)
Common stock issued under stock plans ... 30,216 570,000 -- -- -- -- 570,000
Stock options exercised ................. 12,289 126,000 -- -- -- -- 126,000
Tax benefit on stock options exercised .. -- 119,000 -- -- -- -- 119,000
Comprehensive income:
Net income for the year
ended December 31, 2003 .............. -- -- 3,491,000 -- -- -- 3,491,000
Unrealized holding losses on securities
available for sale arising during the
period (net tax benefit of $117,000) . -- -- -- -- -- (185,000) (185,000)
Reclassification adjustment for gains in
net income (net tax of $19,000) ...... -- -- -- -- -- 30,000 30,000
------------
Total comprehensive income .............. 3,336,000
-------------------------------------------------------------------------------------
Balance -- December 31, 2003 .............. 4,298,894 $19,552,000 $ 7,593,000 -- $ -- $ 4,000 $ 27,149,000
Cash dividends paid ($0.22 per share) ... -- -- (1,016,000) -- -- -- (1,016,000)
5% Stock dividend ....................... 155,502 3,577,000 (3,679,000) 4,339 100,000 -- (2,000)
Common stock issued under stock plans ... 14,892 322,000 -- 15,661 354,000 -- 676,000
Stock options exercised ................. 30,356 292,000 -- -- -- -- 292,000
Tax benefit on stock options exercised .. -- 150,000 -- -- -- -- 150,000
Repurchase common stock ................. -- -- -- (20,000) (454,000) -- (454,000)
Comprehensive income:
Net income for the year
ended December 31, 2004 .............. -- -- 3,848,000 -- -- -- 3,848,000
Unrealized holding losses on securities
available for sale arising during the
period (net tax benefit of $113,000) -- -- -- -- -- (181,000) (181,000)
Reclassification adjustment for losses in
net income (net tax benefit of $1,000) -- -- -- -- -- (2,000) (2,000)
------------
Total comprehensive income .............. 3,665,000
-------------------------------------------------------------------------------------
Balance -- December 31, 2004 .............. 4,499,644 $23,893,000 $ 6,746,000 -- $ -- $(179,000) $ 30,460,000
Cash dividends paid ($0.26 per share) ... -- -- (1,244,000) -- -- -- (1,244,000)
5% Stock dividend ....................... 227,275 3,334,000 (3,335,000) -- -- -- (1,000)
Common stock issued under stock plans ... 45,280 771,000 -- 379 5,000 -- 776,000
Stock options exercised ................. 15,690 143,000 -- -- -- -- 143,000
Tax benefit on stock options exercised .. -- 70,000 -- -- -- -- 70,000
Repurchase common stock ................. -- -- -- (39,960) (561,000) -- (561,000)
Comprehensive income:
Net income for the year
ended December 31, 2005 .............. -- -- 4,480,000 -- -- -- 4,480,000
Unrealized holding losses on securities
available for sale arising during the
period (net tax benefit of $464,000) . -- -- -- -- -- (739,000) (739,000)
------------
Total comprehensive income ................ 3,741,000
-------------------------------------------------------------------------------------
Balance --December 31, 2005 ............... 4,787,889 $28,211,000 $ 6,647,000 (39,581) $(556,000) $(918,000) $ 33,384,000
=====================================================================================
See accompanying notes to consolidated financial statements.
A-22
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31,
------------------------------------------
2005 2004 2003
------------------------------------------
Cash flows from operating activities:
Net income ................................................... $ 4,480,000 $ 3,848,000 $ 3,491,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 577,000 622,000 619,000
Amortization of premiums and accretion of discounts, net 428,000 593,000 791,000
Accretion of deferred loan fees ........................ (127,000) (142,000) (172,000)
Provision for loan losses .............................. 600,000 540,000 425,000
Originations of mortgage loans held for sale ........... (27,897,000) (12,032,000) (37,063,000)
Proceeds from sale of mortgage loans ................... 26,323,000 12,515,000 39,037,000
Gain on sale of loans .................................. (239,000) (135,000) (451,000)
Loss (gain) on call and sale of securities ............. -- 3,000 (49,000)
Loss on write off of fixed asset ....................... -- 63,000 --
Gain on sale of fixed assets ........................... -- -- (54,000)
Deferred income tax benefit ............................ (344,000) (254,000) (44,000)
Amortization of intangible assets ...................... 39,000 41,000 44,000
Increase in accrued interest receivable ................ (510,000) (59,000) (223,000)
Increase in bank owned life insurance .................. (210,000) -- --
Tax benefit of stock plans ............................. 70,000 150,000 119,000
(Increase) decrease in other assets .................... (129,000) 360,000 (614,000)
Increase (decrease) in other liabilities ............... 569,000 (105,000) 217,000
------------------------------------------
Net cash provided by operating activities ........... 3,630,000 6,008,000 6,073,000
------------------------------------------
Cash flows from investing activities:
Purchase of securities available for sale .............. (17,175,000) (13,689,000) (58,690,000)
Proceeds from maturities and principal repayments
on securities available for sale .................... 7,637,000 8,699,000 5,552,000
Proceeds from sales and calls on securities
available for sale .................................. 500,000 9,211,000 4,270,000
Purchase of securities held to maturity ................ (6,060,000) (3,273,000) (24,317,000)
Proceeds from maturities and principal repayments on
securities held to maturity ......................... 8,107,000 9,968,000 17,097,000
Proceeds from calls of securities held to maurity ...... -- 5,235,000 15,125,000
Purchase of FHLB-NY stock .............................. (296,000) (321,000) (263,000)
Investment in special purpose subsidiary ............... -- -- (217,000)
Net increase in loans .................................. (49,540,000) (34,531,000) (45,450,000)
Purchase of bank owned life insurance .................. (8,000,000)
Sales of premises and equipment ........................ -- -- 227,000
Additions to premises and equipment .................... (3,608,000) (481,000) (696,000)
------------------------------------------
Net cash used in investing activities ............... (68,435,000) (19,182,000) (87,362,000)
------------------------------------------
Cash flows from financing activities:
Net increase in noninterest-bearing deposits ........... 3,683,000 9,396,000 11,501,000
Net increase in interest-bearing deposits .............. 43,527,000 5,984,000 27,302,000
Net increase (decrease) in securities sold
under agreement to repurchase ....................... 1,361,000 (177,000) 1,112,000
Net increase in short term borrowings .................. 7,900,000 5,500,000 20,000,000
Payments on long term borrowings ....................... (1,543,000) (1,371,000) --
Issuance of subordinated debentures .................... -- -- 7,217,000
Cash dividends paid on common stock .................... (1,245,000) (1,018,000) (819,000)
Purchase of treasury stock ............................. (561,000) (454,000) --
Exercise of stock options .............................. 143,000 292,000 126,000
Issuance of common stock ............................... 776,000 676,000 570,000
------------------------------------------
Net cash provided by financing activities ........... 54,041,000 18,828,000 67,009,000
------------------------------------------
Net (decrease) increase in cash and cash equivalents ... (10,764,000) 5,654,000 (14,280,000)
Cash and cash equivalents - beginning .................. 24,792,000 19,138,000 33,418,000
------------------------------------------
Cash and cash equivalents - ending ..................... $ 14,028,000 $ 24,792,000 $ 19,138,000
==========================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ................. 6,209,000 4,831,000 4,676,000
Cash paid during the year for income taxes ............. 2,620,000 2,260,000 1,934,000
A-23
See accompanying notes to consolidated financial statements.
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Note 1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Stewardship
Financial Corporation ("the Corporation") and its wholly owned subsidiary,
Atlantic Stewardship Bank ("the Bank"). Atlantic Stewardship Bank includes its
wholly owned subsidiaries, Stewardship Investment Corp. and Stewardship Realty
Corporation, LLC. All significant intercompany accounts and transactions have
been eliminated in the consolidated financial statements. Certain prior period
amounts have been reclassified to conform to the current presentation.
Basis of consolidated financial statements presentation
The consolidated financial statements of the Corporation have been prepared in
conformity with U.S. generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the dates of
the statements of financial condition and revenues and expenses during the
reporting periods. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant changes
relate to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions in the market area.
Cash and cash equivalents
Cash and cash equivalents include cash and due from banks, commercial paper,
interest-bearing deposits in other banks, money market funds and federal funds
sold. Generally, federal funds are sold for one-day periods.
Securities available for sale and held to maturity
The Corporation classifies its securities as securities held to maturity or
securities available for sale. Investments in debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as securities held to maturity and are carried at cost, adjusted for
amortization of premium and accretion of discount, which are recognized as
adjustments to income, on a level yield basis. All other securities are
classified as securities available for sale. Securities available for sale may
be sold prior to maturity in response to changes in interest rates or prepayment
risk, for asset/liability management purposes, or other similar factors. These
securities are carried at fair value with unrealized holding gains or losses
reported in a separate component of stockholders' equity, net of the related tax
effects. Realized gains or losses on sales of securities are based upon the
specific identification method. Management evaluates securities for other than
temporary impairment and records such adjustments as necessary.
Federal Home Loan Bank of New York Stock
As a condition of membership, the Corporation is required to maintain shares of
stock in the Federal Home Loan Bank of New York (FHLB-NY). Effective December 1,
2005, FHLB-NY implemented a new capital plan which resulted in an automatic
exchange of shares for new shares of FHLB-NY Class B stock and changed a
member's minimum stock investment requirements. The Class B stock has two
subclasses, one for membership stock purchase requirements and the other for
activity-based stock purchase requirements. The membership requirements are
measured at the end of each calendar year and is based on 0.2% of
mortgage-related assets consisting of residential mortgage loans and
mortgage-backed securities. The activity-based stock purchase requirement is
equal to 4.5% of outstanding borrowings with the FHLB-NY. Such shares are
carried at cost.
Mortgage loans held for sale
Mortgage loans held for sale are reported at the lower of cost or market on an
aggregate basis. Mortgage loans held for sale are carried net of deferred fees,
which are recognized as income at the time the loans are sold to permanent
investors. Gains or losses on the sale of mortgage loans held for sale are
recognized at the settlement date and are determined by the difference between
the net proceeds and the amortized cost.
A-24
Loans
The Corporation's lending activities are concentrated in loans secured by real
estate located in northern New Jersey and therefore collectibility of the loan
portfolio is susceptible to changes in real estate market conditions in the
northern New Jersey market. The Corporation has not made loans to borrowers
outside the United States.
Loans are carried at the principal amount outstanding, net of unearned discounts
and deferred loan fees and costs. Interest on loans is accrued and credited to
interest income as earned.
Loans are considered delinquent when contractual principal and interest has not
been paid for more than 30 days. The accrual of interest income is discontinued
on a loan when certain factors indicate reasonable doubt as to the
collectibility of principal and interest. At the time a loan is placed on
nonaccrual status, previously accrued and uncollected interest is reversed
against interest income in the current period. Interest collections on
nonaccrual loans are generally credited to interest income when received. Such
loans are restored to an accrual status only if the loan is brought
contractually current and the borrower has demonstrated an ability to make
future payments of principal and interest.
The Corporation defined the population of impaired loans to include nonaccrual
loans. Impaired loans are individually assessed to determine that the loan's
carrying value is not in excess of the fair value of the collateral or the
present value of the loan's expected future cash flows.
Loan fees collected and certain costs incurred related to loan originations are
deferred and amortized as an adjustment to interest income over the life of the
related loans. The deferred fees and costs, recorded as an adjustment to loans
outstanding, are deferred and amortized to interest income over the life of the
loan using the effective interest method.
Allowance for loan losses
An allowance for loan losses is maintained at a level considered adequate to
absorb inherent loan losses. Management of the Corporation, in determining the
provision for loan losses, considers the risks inherent in its loan portfolio
and changes in the nature and volume of its loan activities, along with general
economic and real estate market conditions. The allowance is maintained through
provisions for loan loss that are charged to income. Losses on loans are charged
against the allowance for loan losses when it is believed the collection of
principal is unlikely and the collateral is not adequate.
The Corporation utilizes a two tier approach: (1) identification of problem
loans and the establishment of specific loss allowances on such loans; and (2)
establishment of general allowances on the remainder of its loan portfolio based
on historical loss experience and other economic data management believes
relevant. The Corporation maintains a loan review system, which allows for a
periodic review of its loan portfolio and the early identification of potential
problem loans. Such system takes into consideration, among other things,
delinquency status, size of loans, types of collateral and financial condition
of the borrowers. Specific loan loss allowances are established for identified
loans based on a review of such information and/or appraisals of the underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of loan
portfolio, current economic conditions and management's judgment.
Although management believes that adequate specific and general loan losses are
established, actual losses are dependent upon future events and, as such,
further additions to the level of the specific and general loan loss allowance
may be necessary.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for loan
losses. Such agencies may require the Corporation to recognize additions to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination.
Premises and equipment
Land is stated at cost. Buildings and improvements and furniture, fixtures and
equipment are stated at cost, less accumulated depreciation computed on the
straight-line method over the estimated lives of each type of asset. Estimated
useful lives are three to forty years for buildings and improvements and three
to twenty-five years for furniture, fixtures and equipment. Leasehold
improvements are stated at cost less accumulated amortization computed on the
straight-line method over the shorter of the term of the lease or the useful
life. Significant renewals and improvements are capitalized. Maintenance and
repairs are charged to operations as incurred. Rental income is netted against
occupancy costs in the Consolidated Statements of Income.
Other real estate owned
Other real estate owned (OREO) consists of foreclosed property and is carried at
the lower of cost or fair value less estimated
A-25
selling costs. When a property is acquired, the excess of the carrying amount
over fair value, if any, is charged to the allowance for loan losses. Subsequent
adjustments to the carrying value are recorded in an allowance for OREO and
charged to OREO expense. Operating results for OREO, including rental income,
operating expenses, and gains and losses realized from the sale of property
owned, are also recorded in OREO expense. As of December 31, 2005 and 2004, the
Corporation had no OREO.
Income taxes
The Corporation accounts for taxes under the asset/liability method. Under this
method, deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Other comprehensive income
The Corporation's other comprehensive income is comprised of unrealized gains
and losses on securities available for sale. Disclosure of comprehensive income
for the years end 2005, 2004 and 2003 is presented in the accompanying
Consolidated Statements of Changes in Stockholders' Equity.
Stock plans
At December 31, 2005, the Corporation has two stock-based employee compensation
plans and two director compensation plans, which are described more fully in
Note 13. The Corporation accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Corporation had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation",
to stock-based compensation.
2005 2004 2003
------------------------------------
Net Income:
Net income as reported ...................................... $4,480,000 $3,848,000 $3,491,000
Stock-based compensation included
in net income, net of related tax effects ................ 19,000 22,000 32,000
Total stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects ............................... (100,000) (88,000) (91,000)
------------------------------------
Pro forma net income ........................................ $4,399,000 $3,782,000 $3,432,000
====================================
Earnings per share:
As reported basic earnings per share ........................ $ 0.94 $ 0.82 $ 0.76
As reported diluted earnings per share ...................... 0.93 0.81 0.75
Pro forma basic earnings per share .......................... 0.93 0.81 0.74
Pro forma diluted earnings per share ........................ 0.91 0.80 0.73
Weighted average fair value of options granted during year .. $ -- $ -- $ 6.25
The fair value of options granted for employees and directors is estimated on
the date of the grant using the Black-Scholes option pricing model with the
following assumptions used:
Employee
Stock Options
-------------
2003
-------------
Dividend yield ................................................ 2.02%
Expected volatility ........................................... 51.65%
Risk-free interest rate ....................................... 3.40%
Expected life ................................................. 7 years
Fair value at grant date ...................................... $ 6.25
A-26
Earnings per share
Basic earnings per share is calculated by dividing net income by the average
daily number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation.
Diluted earnings per share is computed similar to that of the basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potential
dilutive common shares were issued.
All share and per share amounts have been restated to reflect a 5% stock
dividend paid November, 2003, 2004 and 2005, a 3 for 2 stock split issued in
July 2003 and a 4 for 3 stock split issued in July 2005.
Intangible assets
Intangible assets are comprised of other intangible assets and core deposit
intangibles. Other intangible assets represent the excess of the fair value of
liabilities assumed over the fair value of tangible assets acquired through a
branch acquisition, completed in 1995, which did not qualify as a business
combination. Other intangible assets amounted to $134,000 and $166,000 at
December 31, 2005 and December 31, 2004, respectively, and are amortized on a
straight-line method over a period of fifteen years.
The core deposit intangible represents the intangible value of depositor
relationships resulting from deposit liabilities assumed in the same
acquisition. The core deposit intangible amounted to $6,000 and $13,000 at
December 31, 2005 and December 31, 2004, respectively, and is amortized on an
accelerated basis over a period of twelve years.
Note 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
Cash reserves are required to be maintained on deposit with the Federal Reserve
Bank based on deposits. In March 2005, the Corporation deployed a deposit
reclassification software that allowed it to minimize the balances needed to be
held at the Federal Reserve Bank to maintain required reserve balances. The
average amount of the reserves on deposit for the years ended December 31, 2005
and 2004 was approximately $2.2 million and $5.9 million, respectively.
Note 3. SECURITIES AVAILABLE FOR SALE
The following is a summary of the contractual maturities and related unrealized
gains and losses of securities available for sale:
December 31, 2005
--------------------------------------------------
Gross Unrealized
Amortized ------------------------ Market
Cost Gains Losses Value
--------------------------------------------------
U.S. Treasury:
Within one year .............................. $ 501,000 $ -- $ 5,000 $ 496,000
U.S. government sponsored agencies:
Within one year .............................. 5,118,000 -- 75,000 5,043,000
After one but within five years .............. 27,023,000 -- 567,000 26,456,000
After five years ............................. 999,000 -- 20,000 979,000
--------------------------------------------------
33,140,000 -- 662,000 32,478,000
--------------------------------------------------
Obligations of state and political subdivisions:
Within one year .............................. 696,000 -- 2,000 694,000
After one but within five years .............. 1,062,000 -- 30,000 1,032,000
After five years ............................. 310,000 -- 5,000 305,000
--------------------------------------------------
2,068,000 -- 37,000 2,031,000
--------------------------------------------------
Mortgage-backed securities:
After one but within five years .............. 2,010,000 -- 77,000 1,933,000
After five years ............................. 26,870,000 8,000 700,000 26,178,000
--------------------------------------------------
28,880,000 8,000 777,000 28,111,000
--------------------------------------------------
Community Reinvestment Act Fund:
Within one year .............................. 1,071,000 -- 20,000 1,051,000
--------------------------------------------------
$65,660,000 $ 8,000 $ 1,501,000 $64,167,000
==================================================
A-27
December 31, 2004
--------------------------------------------------
Gross Unrealized
Amortized ------------------------ Market
Cost Gains Losses Value
--------------------------------------------------
U.S. Treasury:
After one but within five years .............. $ 503,000 $ -- $ 8,000 $ 495,000
U.S. government sponsored agencies:
After one but within five years .............. 23,556,000 29,000 241,000 23,344,000
Obligations of state and political subdivisions:
Within one year .............................. 156,000 2,000 -- 158,000
After one but within five years .............. 1,787,000 -- 30,000 1,757,000
--------------------------------------------------
1,943,000 2,000 30,000 1,915,000
--------------------------------------------------
Mortgage-backed securities:
After one but within five years .............. 193,000 2,000 1,000 194,000
After five years ............................. 29,587,000 126,000 177,000 29,536,000
--------------------------------------------------
29,780,000 128,000 178,000 29,730,000
--------------------------------------------------
Community Reinvestment Act Fund:
Within one year .............................. 1,021,000 9,000 -- 1,030,000
--------------------------------------------------
$56,803,000 $ 168,000 $ 457,000 $56,514,000
==================================================
Issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. This might cause actual maturities to differ from the
contractual maturities summarized above.
Mortgage-backed securities are comprised primarily of government agencies such
as the Government National Mortgage Association ("GNMA") and government
sponsored agencies such as the Federal National Mortgage Association ("FNMA")
and the Federal Home Loan Mortgage Corporation ("FHLMC").
The following tables summarize the fair value and unrealized losses of those
investment securities which reported an unrealized loss at December 31, 2005 and
2004, and if the unrealized loss position was continuous for the twelve months
prior to December 31, 2005 and 2004.
Less than 12 Months 12 Months or Longer Total
---------------------- ------------------------ ------------------------
Unrealized Unrealized Unrealized
2005 Fair Value Losses Fair Value Losses Fair Value Losses
---------------------- ------------------------ ------------------------
U.S. Treasury ................ $ -- $ -- $ 496,000 $ (5,000) $ 496,000 $ (5,000)
U.S. government
sponsored agencies ......... 16,095,000 (267,000) 16,383,000 (395,000) 32,478,000 (662,000)
Obligations of state and
political subdivisions ..... 304,000 (5,000) 1,727,000 (32,000) 2,031,000 (37,000)
Mortgage-backed securities ... 19,432,000 (428,000) 8,280,000 (349,000) 27,712,000 (777,000)
Community Reinvestment
Act Fund ................... 1,051,000 (20,000) -- -- 1,051,000 (20,000)
------------------------------------------------------------------------------
Total temporarily impaired
securities ............. $36,882,000 $ (720,000) $26,886,000 $ (781,000) $63,768,000 $(1,501,000)
==============================================================================
Less than 12 Months 12 Months or Longer Total
---------------------- ------------------------ ------------------------
Unrealized Unrealized Unrealized
2004 Fair Value Losses Fair Value Losses Fair Value Losses
---------------------- ------------------------ ------------------------
U.S. Treasury ................ $ 495,000 $ (8,000) $ -- $ -- $ 495,000 $ (8,000)
U.S. government
sponsored agencies ......... 15,394,000 (200,000) 1,693,000 (41,000) 17,087,000 (241,000)
Obligations of state and
political subdivisions ..... 1,526,000 (27,000) 231,000 (3,000) 1,757,000 (30,000)
Mortgage-backed securities ... 9,443,000 (70,000) 3,857,000 (108,000) 13,300,000 (178,000)
------------------------------------------------------------------------------
Total temporarily impaired
securities ............. $26,858,000 $ (305,000) $ 5,781,000 $ (152,000) $32,639,000 $ (457,000)
==============================================================================
A-28
The unrealized losses are primarily due to changes in interest rates. These
securities have not been considered impaired as scheduled principal and interest
payments have been made and management anticipates collecting the entire
principal balance as scheduled. Management believes the price variation is
temporary in nature and has the ability and intent to hold these securities to
maturity or for a sufficient amount of time to recover the recorded principal.
Cash proceeds realized from sales and calls of securities available for sale for
the years ended December 31, 2005, 2004 and 2003 were $500,000, $9,211,000 and
$4,270,000 respectively. There were no gains and no losses realized on sales or
calls during the year ended December 31, 2005. Gross gains totaling $4,000 and
gross losses totaling $9,000 were realized on sales and calls of securities
during the year ended December 31, 2004. Gross gains totaling $49,000 and no
losses were realized on sales and calls of securities during the year ended
December 31, 2003.
Note 4. SECURITIES HELD TO MATURITY
The following is a summary of the contractual maturities and related unrealized
gains and losses of securities held to maturity:
December 31, 2005
---------------------------------------------------
Gross Unrealized
Carrying ------------------------ Estimated
Value Gains Losses Market Value
---------------------------------------------------
U.S. Treasury:
Within one year .............................. $ 502,000 $ -- $ 1,000 $ 501,000
After one but within five years .............. 502,000 2,000 -- 504,000
--------------------------------------------------
1,004,000 2,000 1,000 1,005,000
--------------------------------------------------
U.S. government sponsored agencies:
Within one year .............................. 5,211,000 1,000 70,000 5,142,000
After one but within five years .............. 5,902,000 -- 98,000 5,804,000
After five years ............................. 1,000,000 -- 12,000 988,000
--------------------------------------------------
12,113,000 1,000 180,000 11,934,000
--------------------------------------------------
Obligations of state and political subdivisions:
Within one year .............................. 6,078,000 7,000 12,000 6,073,000
After one but within five years .............. 8,439,000 20,000 90,000 8,369,000
After five years ............................. 1,230,000 -- 26,000 1,204,000
--------------------------------------------------
15,747,000 27,000 128,000 15,646,000
--------------------------------------------------
Mortgage-backed securities:
After one but within five years .............. 917,000 -- 22,000 895,000
After five years ............................. 8,036,000 60,000 101,000 7,995,000
--------------------------------------------------
8,953,000 60,000 123,000 8,890,000
--------------------------------------------------
$37,817,000 $ 90,000 $ 432,000 $37,475,000
==================================================
December 31, 2004
---------------------------------------------------
Gross Unrealized
Carrying ------------------------ Estimated
Value Gains Losses Market Value
---------------------------------------------------
U.S. Treasury:
After one but within five years .............. $ 1,007,000 $ 30,000 $ -- $ 1,037,000
U.S. government sponsored agencies:
Within one year .............................. 511,000 1,000 -- 512,000
After one but within five years .............. 8,144,000 21,000 76,000 8,089,000
--------------------------------------------------
8,655,000 22,000 76,000 8,601,000
--------------------------------------------------
Obligations of state and political subdivisions:
Within one year .............................. 3,517,000 36,000 1,000 3,552,000
After one but within five years .............. 13,613,000 210,000 14,000 13,809,000
After five years ............................. 558,000 -- 2,000 556,000
--------------------------------------------------
17,688,000 246,000 17,000 17,917,000
--------------------------------------------------
Mortgage-backed securities:
After one but within five years .............. 424,000 6,000 -- 430,000
After five years ............................. 12,337,000 202,000 23,000 12,516,000
--------------------------------------------------
12,761,000 208,000 23,000 12,946,000
--------------------------------------------------
$40,111,000 $ 506,000 $ 116,000 $40,501,000
==================================================
A-29
Issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. This might cause actual maturities to differ from the
contractual maturities summarized above.
Mortgage-backed securities are comprised primarily of government agencies such
as GNMA and government sponsored agencies such as FNMA and FHLMC.
The following tables summarize the fair value and unrealized losses of those
investment securities which reported an unrealized loss at December 31, 2005 and
2004, and if the unrealized loss position was continuous for the twelve months
prior to December 31, 2005 and 2004.
Less than 12 Months 12 Months or Longer Total
---------------------- ------------------------ ------------------------
Unrealized Unrealized Unrealized
2005 Fair Value Losses Fair Value Losses Fair Value Losses
---------------------- ------------------------ ------------------------
U.S. Treasury ................ $ 501,000 $ (1,000) $ -- $ -- $ 501,000 $ (1,000)
U.S. government
sponsored agencies ......... 5,380,000 (62,000) 6,051,000 (118,000) 11,431,000 (180,000)
Obligations of state and
political subdivisions ..... 7,379,000 (88,000) 2,280,000 (40,000) 9,659,000 (128,000)
Mortgage-backed securities ... 2,902,000 (47,000) 2,515,000 (76,000) 5,417,000 (123,000)
------------------------------------------------------------------------------
Total temporarily impaired
securities ............. $16,162,000 $ (198,000) $10,846,000 $ (234,000) $27,008,000 $ (432,000)
==============================================================================
Less than 12 Months 12 Months or Longer Total
---------------------- ------------------------ ------------------------
Unrealized Unrealized Unrealized
2004 Fair Value Losses Fair Value Losses Fair Value Losses
---------------------- ------------------------ ------------------------
U.S. government
sponsored agencies ......... $ 5,627,000 $ (63,000) $ 486,000 $ (13,000) $ 6,113,000 $ (76,000)
Obligations of state and
political subdivisions ..... 3,335,000 (17,000) -- -- 3,335,000 (17,000)
Mortgage-backed securities ... 2,254,000 (11,000) 1,013,000 (12,000) 3,267,000 (23,000)
------------------------------------------------------------------------------
Total temporarily impaired
securities ............. $11,216,000 $ (91,000) $ 1,499,000 $ (25,000) $12,715,000 $ (116,000)
==============================================================================
The unrealized losses are primarily due to changes in interest rates. These
securities have not been considered impaired as scheduled principal and interest
payments have been made and management anticipates collecting the entire
principal balance as scheduled. Management believes the price variation is
temporary in nature and has the ability and intent to hold these securities to
maturity.
There were no cash proceeds realized on calls for the year ended December 31,
2005. Cash proceeds realized from calls of securities held to maturity for the
years ended December 31, 2004 and 2003 were $5,235,000 and $15,125,000
respectively. Gross gains totaling $2,000 and no losses were realized from calls
for the year ended December 31, 2004. There were no gains or losses realized on
calls for the years ended December 31, 2005 and 2003.
The carrying value of securities pledged to secure treasury tax and loan
deposits and public deposits for the three years ended December 31, 2005, 2004
and 2003 were $1,002,000, $1,003,000 and $1,004,000, respectively. See also Note
9 to financial statements regarding securities pledged as collateral for
securities sold under agreements to repurchase.
A-30
Note 5. LOANS
The loan portfolio consisted of the following:
December 31,
----------------------------
2005 2004
----------------------------
Mortgage:
Residential .................................. $ 45,604,000 $ 41,569,000
Commercial ................................... 163,309,000 130,762,000
Commercial ..................................... 65,011,000 55,252,000
Equity ......................................... 20,271,000 21,484,000
Installment .................................... 51,540,000 47,218,000
Other .......................................... 506,000 260,000
----------------------------
Total gross loans .......................... 346,241,000 296,545,000
----------------------------
Less: Deferred loan fees, net of costs ......... 418,000 337,000
Allowance for loan losses ................ 3,847,000 3,299,000
----------------------------
4,265,000 3,636,000
----------------------------
Loans, net ..................................... $341,976,000 $292,909,000
============================
At December 31, 2005, 2004 and 2003, loans participated by the Corporation to
other organizations totaled approximately $6,017,000, $5,730,000 and $5,983,000,
respectively.
Activity in the allowance for loan losses is summarized as follows::
December 31,
---------------------------------------
2005 2004 2003
---------------------------------------
Balance, beginning ................... $ 3,299,000 $ 2,888,000 $ 2,689,000
Provision charged to operations ...... 600,000 540,000 425,000
Recoveries of loans charged off ...... 5,000 12,000 3,000
Loans charged off .................... (57,000) (141,000) (229,000)
---------------------------------------
Balance, ending ...................... $ 3,847,000 $ 3,299,000 $ 2,888,000
=======================================
The Corporation has entered into lending transactions in the ordinary course of
business with directors, executive officers and principal stockholders of the
Corporation and their affiliates on the same terms as those prevailing for
comparable transactions with other borrowers. At December 31, 2005 and 2004,
these loans aggregated approximately $1,684,000 and $444,000, respectively.
During the year ended December 31, 2005, new loans totaling $55,000 were granted
and repayments totaled approximately $231,000. During the year ended December
31, 2005, loans for new directors totaled $1,441,000 offset by a $25,000 loan of
a director who resigned. The loans, at December 31, 2005, were current as to
principal and interest payments, and do not involve more than normal risk of
collectability.
Note 6. NONPERFORMING ASSETS
Nonperforming assets include the following:
December 31,
----------------------
2005 2004
----------------------
Nonaccrual loans ..................................... $472,000 $ 262,000
Loans past due ninety days or more and accruing ...... 55,000 947,000
Restructured loans ................................... -- 215,000
----------------------
Total nonperforming loans ....................... $527,000 $1,424,000
======================
Restructured loans classified as nonaccrual for the years ended December 31,
2005 and 2004 were $152,000 and $162,000, respectively.
A-31
There were no restructured loans classified as loans past due ninety days or
more and accruing for the years ended December 31, 2005 and 2004.
The following information is presented for loans classified as nonaccrual and
restructured:
Year ended December 31,
-------------------------
2005 2004 2003
-------------------------
Income that would have been recorded under
contractual terms ................................. $44,000 $47,000 $57,000
Less interest income received ....................... 6,000 20,000 13,000
-------------------------
Lost income on nonperforming loans at year end ...... $38,000 $27,000 $44,000
=========================
Impaired loans consisted of the following:
December 31,
--------------------------------
2005 2004 2003
--------------------------------
Impaired Loans
With related allowance for loan loss ....... $152,000 $ 477,000 $1,073,000
Without related allowance for loan loss .... 320,000 947,000 17,000
--------------------------------
Total impaired loans ......................... $472,000 $1,424,000 $1,090,000
================================
Related allowance for possible credit losses . $ 29,000 $ 44,000 $ 100,000
================================
Average investment in impaired loans ......... $430,000 $1,431,000 $1,258,000
================================
Interest recognized on impaired loans ........ $ 6,000 $ 71,000 $ 44,000
================================
Note 7. PREMISES AND EQUIPMENT, NET
December 31,
-------------------------
2005 2004
-------------------------
Land .............................................. $ 2,999,000 $1,116,000
Buildings and improvements ........................ 2,698,000 1,971,000
Leasehold improvements ............................ 972,000 732,000
Furniture, fixtures and equipment ................. 3,509,000 3,335,000
-------------------------
10,178,000 7,154,000
Less accumulated depreciation and amortization .... 3,714,000 3,721,000
-------------------------
Total premises & equipment, net ................... $ 6,464,000 $3,433,000
=========================
Amounts charged to net occupancy expense for depreciation and amortization of
banking premises and equipment amounted to $577,000, $622,000 and $619,000 in
2005, 2004 and 2003, respectively.
A-32
Note 8. DEPOSITS
December 31, 2005 December 31, 2004
-------------------------------------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-------------------------------------------------------
Noninterest-bearing demand ............. 0% $ 93,924,000 0% $ 90,241,000
NOW accounts ........................... 1.29% 72,023,000 1.02% 60,025,000
Money market accounts .................. 1.07% 50,883,000 0.74% 64,160,000
-------------------------------------------------------
Total interest-bearing demand .......... 1.20% 122,906,000 0.88% 124,185,000
Statement savings and clubs ............ 0.59% 41,396,000 0.61% 45,492,000
Business savings ....................... 0.51% 4,384,000 0.49% 4,474,000
-------------------------------------------------------
Total savings .......................... 0.58% 45,780,000 0.60% 49,966,000
IRA investment and variable rate savings 3.59% 21,324,000 3.43% 19,490,000
Money market certificates .............. 3.59% 120,194,000 2.36% 73,036,000
-------------------------------------------------------
Total certificates of deposit .......... 3.59% 141,518,000 2.59% 92,526,000
-------------------------------------------------------
Total interest-bearing deposits ........ 2.20% 310,204,000 1.42% 266,677,000
-------------------------------------------------------
Total deposits ......................... 1.69% $404,128,000 1.06% $356,918,000
=======================================================
Certificates of deposit with balances of $100,000 or more at December 31, 2005
and 2004, totaled approximately $62,343,000 and $32,214,000, respectively.
Interest on certificates of deposit with balances of $100,000 or more totaled
$1,562,000, $798,000, and $908,000 for the years ended December 31, 2005, 2004
and 2003, respectively.
The scheduled maturities of certificates of deposit were as follows:
December 31,
-------------------------------
2005 2004
-------------------------------
One year or less ........................ $ 49,075,000 $58,819,000
After one to three years ................ 84,950,000 30,169,000
After three years ....................... 7,493,000 3,538,000
-------------------------------
$141,518,000 $92,526,000
===============================
Note 9. OTHER BORROWINGS
Federal Home Loan Bank of New York Advances
During the years 2005 and 2004, the maximum amount of FHLB-NY advances
outstanding at any month end was $30.5 million and $24.1 million, respectively.
The average amount of advances outstanding during the year ended December 31,
2005 and 2004 was $17.1 million and $19.1 million, respectively. As of December
31, 2005, all FHLB-NY advances had fixed rates. The advances as of December 31,
2005 are scheduled for repayment as follows:
Weighted
Average
Maturity Amount Rate
-------- ----------- ------------
2006 $15,400,000 4.34%
2008 5,086,000 3.26%
2013 10,000,000 3.82%
-----------
$30,486,000 3.99%
===========
A-33
Advances totaling $10.0 million are convertible by the FHLB-NY quarterly into
any FHLB-NY advance at current market rate. This conversion feature is only
available if the three month LIBOR resets at or above 7.50%.
Advances from the FHLB-NY were secured by a blanket assignment of the
Corporation's unpledged, qualifying mortgage loans, mortgage-backed securities
and investment securities. Such loans and securities remain under the control of
the Corporation.
The Corporation had an available overnight line of credit with the FHLB-NY for a
maximum amount of $41.6 million at December 31, 2005. At December 31, 2005 the
Bank had utilized $5.4 million of this line.
Securities Sold Under Agreement to Repurchase
At December 31, 2005 and 2004, securities sold under agreements to repurchase
were collateralized by U.S. Treasury and agency securities having a carrying
value of approximately $10,089,000 and $5,776,000, respectively. These
securities were maintained in a separate safekeeping account within the
Corporation's control.
December 31,
--------------------------
2005 2004
--------------------------
Balance .......................................... $4,731,000 $3,370,000
Weighted average interest rate ................... 3.48% 1.99%
Weighted average length of maturity .............. 69 days 108 days
Maximum amount outstanding at any month end
during the year ................................ $5,422,000 $3,950,000
Average amount outstanding during the year ....... $3,371,000 $2,832,000
Average interest rate during the year ............ 2.91% 1.31%
Note 10. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
On September 17, 2003, Stewardship Statutory Trust I (the "Trust"), a statutory
business trust, and a wholly owned subsidiary of Stewardship Financial
Corporation, issued $7,000,000 Fixed/Floating Rate Capital Securities ("Capital
Securities"), the proceeds from which the Trust used to purchase from the
Corporation, $7,217,000 of Fixed/Floating Rate Junior Subordinated Deferrable
Interest Debentures ("Debentures") maturing September 17, 2033. The Trust is
obligated to distribute all proceeds of a redemption whether voluntary or upon
maturity, to holders of the Capital Securities. Stewardship Financial
Corporation's obligation with respect to the Capital Securities, and the
subordinated debentures, when taken together, provide a full and unconditional
guarantee on a subordinated basis by Stewardship Financial Corporation of the
Trust's obligations to pay amounts when due on the Capital Securities.
The Capital Securities and the Debentures both bear a fixed interest rate of
6.75% until September 17, 2008 and thereafter shall float quarterly at a rate of
3-Month LIBOR plus 2.95%.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" was
issued in January 2003 and was reissued as FASB Interpretation No. 46 (revised
December 2003) ("FIN 46R"). FIN 46 and FIN 46R provided guidance on the
identification of entities controlled through means other than voting rights and
specified how the Corporation should evaluate its interest in a variable
interest entity for purposes of determining whether to consolidate that entity.
If a variable interest entity does not effectively disperse risk among the
parties involved, it must be consolidated by its primary beneficiary.
The Corporation adopted FIN 46R on December 31, 2003, deconsolidating its
investment in Stewardship Statutory Trust I, the subsidiary trust formed in
connection with the issuance of subordinated debentures (trust preferred
securities). In July 2003, the Board of Governors of the Federal Reserve System
instructed bank holding companies to continue to include trust preferred
securities in their Tier I capital for regulatory purposes until notice is given
to the contrary. There can be no assurance that the Federal Reserve System will
continue to allow bank holding companies to include trust preferred securities
in Tier I capital for regulatory purposes. As of December 31, 2005, assuming the
Corporation was not allowed to include the $7,000,000 in trust preferred
securities issued by Stewardship Statutory Trust I in Tier I capital, the
Corporation would remain "well capitalized".
A-34
Note 11. REGULATORY CAPITAL REQUIREMENTS
Regulations of the Board of Governors of the Federal Reserve System ("FRB")
require bank holding companies to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 2005, the Corporation was
required to maintain (i) a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.0% and (ii) minimum ratios of Tier 1 and total capital to
risk-weighted assets of 4.0% and 8.0%, respectively. The Bank must comply with
substantially similar capital regulations promulgated by the FDIC.
Under its prompt corrective action regulations, the FRB is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage (Tier 1) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the FRB about capital components, risk
weightings and other factors.
Management believes that, as of December 31, 2005, the Bank and the Corporation
have met all capital adequacy requirements to which they are subject.
The following is a summary of the Corporation's actual capital amounts and
ratios as of December 31, 2005 and 2004, compared to the FRB minimum capital
adequacy requirements and the FRB requirements for classification as a well
capitalized institution:
FRB Requirements
-----------------------------------------
Minimum Capital For Classification
Actual Adequacy as Well Capitalized
------------------ ------------------ ---------------------
Amount Ratio Amount Ratio Amount Ratio
------------------ ------------------ ---------------------
December 31, 2005
Leverage (Tier 1) capital $41,143,000 8.71% $18,899,000 4.00% $23,624,000 5.00%
Risk-based capital:
Tier 1 ................ 41,143,000 11.16% 14,741,000 4.00% 22,111,000 6.00%
Total ................. 44,990,000 12.21% 29,482,000 8.00% 36,852,000 10.00%
December 31, 2004
Leverage (Tier 1) capital $37,460,000 9.08% $16,506,000 4.00% $20,632,000 5.00%
Risk-based capital:
Tier 1 ................ 37,460,000 12.48% 12,011,000 4.00% 18,016,000 6.00%
Total ................. 40,758,000 13.57% 24,022,000 8.00% 30,027,000 10.00%
Note 12. BENEFIT PLANS
The Corporation has a noncontributory profit sharing plan covering all eligible
employees. Contributions are determined by the Corporation's Board of Directors
on an annual basis. Total profit sharing plan expense for the years ended
December 31, 2005, 2004 and 2003 amounted to approximately $395,000, $327,000
and $290,000, respectively.
The Corporation also has a 401(k) plan which covers all eligible employees.
Participants may elect to contribute up to 15% of their salaries, not to exceed
the applicable limitations as per the Internal Revenue Code. The Corporation, on
an annual basis, may elect to match 50% of the participant's first 5%
contribution. Total 401(k) expense for the years ended December 31, 2005, 2004
and 2003 amounted to approximately $65,000, $59,000 and $50,000, respectively.
During 1996, the Corporation adopted an Employee Stock Purchase Plan which
allows all eligible employees to authorize a specific payroll deduction from his
or her base compensation. Total stock purchases amounted to 2,384, 2,106 and
3,277 shares during 2005, 2004 and 2003, respectively.
A-35
Note 13. STOCK-BASED COMPENSATION
At December 31, 2005, the Corporation had four types of stock award programs
referred to as the Employee Stock Bonus Plan, the Director Stock Plan, an
Employee Stock Option Plan and a Stock Option Plan for Non-Employee Directors.
The Employee Stock Bonus Plan is intended to provide incentives which will
retain highly competent key management employees of the Corporation by providing
them with a bonus in the form of shares of the common stock of the Corporation.
The Corporation has not granted shares during 2005, 2004 and 2003 under this
plan.
The Director Stock Plan permits members of the Board of Directors of the Bank to
receive any monthly Board of Directors' fees in shares of the Corporation's
common stock, rather than in cash. The Corporation issued 2,232, 2,258 and 5,226
shares during 2005, 2004 and 2003, respectively.
The Employee Stock Option Plan provides for options to purchase shares of Common
Stock to be issued to key employees of the Corporation at the discretion of the
Stock Option Committee. The committee has the authority to determine the terms
and conditions of the options granted, the exercise price thereof, and whether
the options are incentive or non-statutory options. The Employee Stock Option
Plan has reserved 199,457 shares of common stock for issuance. The options were
issued with an exercise price which represented market price of the stock at the
date of grant. Options are exercisable starting one year from the date of the
grant and expire ten years from the date of grant. There were no options granted
during 2004 or 2005. Options were granted to all full-time employees on July 15,
2003. In December 2005, the Compensation Committee of the Board of Directors
approved an acceleration of the vesting of all options granted on July 15, 2003
to full vesting. The decision to accelerate the vesting of options was
undertaken to eliminate the future compensation expense the Corporation would
otherwise recognize in its income statement with respect to those options upon
the adoption of SFAS 123R in January, 2006. A summary of the status of the
qualified stock options as of December 31, 2005, 2004 and 2003 and changes
during the years then ended on those dates is presented below:
2005 2004 2003
----------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------
Outstanding at beginning of year . 74,688 $ 6.41 80,188 $ 6.52 76,433 $ 5.12
Granted .......................... -- -- -- -- 13,428 13.61
Exercised ........................ 1,546 6.52 3,784 6.97 9,056 4.77
Forfeited ........................ 772 13.61 1,716 10.03 617 13.61
----------------------------------------------------------------
Outstanding at end of year ....... 72,370 $ 6.33 74,688 $ 6.41 80,188 $ 6.52
Options exercisable at year end .. 72,370 62,553 59,514
Weighted average fair value of
options granted during the year $ -- $ -- $ 6.25
The following table summarizes information about the qualified employee stock
options outstanding at December 31, 2005:
Options Outstanding
----------------------------------------------------------------
Number Weighted Avg. Weighted Number
Outstanding Remaining Average Exercisable
at 12/31/05 Contractual Life Exercise Price 12/31/05
----------------------------------------------------------------
Range of Exercise Prices:
$ 3 - 5 ...................... 43,353 1.50 $ 4.26 43,353
$ 5 - 8 ...................... 17,904 3.78 6.84 17,904
$ 8 - 11 ...................... -- -- -- --
$11 - 14 ...................... 11,113 7.54 13.61 11,113
-------- ------------------------------------------------------------
$ 3 - 14 ...................... 72,370 2.99 $ 6.33 72,370
============================================================
A-36
The 2001 Stock Option Plan for Non-Employee Directors provided for options to
purchase shares of common stock to be issued to Directors of the Corporation.
The plan reserved 153,154 shares of common stock for issuance. Options would be
exercisable 20% each year for five years. No option may be exercised more than
five years after the date of its grant. A summary of the status of the
nonqualified stock options as of December 31, 2005, 2004 and 2003 and changes
during the years then ended on those dates is presented below:
2005 2004 2003
------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------
Outstanding at beginning of year ..... 66,371 $ 7.33 107,211 $ 7.02 112,313 $ 6.51
Granted .............................. 5,105 14.67 -- -- 7,658 13.61
Exercised ............................ 20,420 6.51 40,840 6.51 12,760 6.51
Forfeited ............................ 7,658 13.61 -- -- -- --
----------------------------------------------------------------
Outstanding at end of year ........... 43,398 $ 7.47 66,371 $ 7.33 107,211 $ 7.02
Options exercisable at year end ...... 17,872 12,765 30,633
Weighted average fair value of
options granted during the year ... $ 14.67 $ -- $ 13.61
The following table summarizes information about the nonqualified nonemployee
Director stock options outstanding at December 31, 2005:
Options Outstanding
-------------------------------------------------------------------
Number Weighted Avg. Weighted Number
Outstanding Remaining Average Exercisable
at 12/31/05 Contractual Life Exercise Price 12/31/05
-------------------------------------------------------------------
Range of Exercise Prices:
$ 6 - 9 ................ 38,293 0.35 $ 6.51 17,872
$ 9 - 12 ................ -- -- -- --
$12 - 15 ................ 5,105 4.80 14.67 --
-------- ------------------------------------------------------------
$ 6 - 15 ................ 43,398 0.87 $ 7.47 17,872
============================================================
The Corporation applies the "intrinsic value based method" as described in
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock-based
compensation. Accordingly, no compensation cost has been recognized for these
stock option plans. Consistent with SFAS 123, if compensation cost for the plans
was included, the Corporation's net income and earnings per share would have
been reduced to the proforma amounts as disclosed in Note 1.
A-37
Note 14: EARNINGS PER SHARE
The following reconciles the income available to common shareholders (numerator)
and the weighted average common stock outstanding (denominator) for both basic
and diluted earnings per share for 2005, 2004 and 2003:
2005 2004 2003
------------------------------------
Net income .................................. $4,480,000 $3,848,000 $3,491,000
====================================
Income available to common stockholders
basic and diluted ........................ $4,480,000 $3,848,000 $3,491,000
====================================
Weighted average common shares
outstanding - basic ....................... 4,753,253 4,677,525 4,616,452
Effect of dilutive securities - stock options 55,974 67,565 65,582
------------------------------------
Weighted average common shares
outstanding - diluted ..................... 4,809,227 4,745,090 4,682,034
====================================
Basic earnings per share .................... $ 0.94 $ 0.82 $ 0.76
====================================
Dilute earnings per share ................... $ 0.93 $ 0.81 $ 0.75
====================================
Note 15. INCOME TAXES
The components of income taxes (benefit) are summarized as follows:
Year ended December 31,
----------------------------------------------
2005 2004 2003
----------------------------------------------
Current tax expense:
Federal .................. $ 2,218,000 $ 1,877,000 $ 1,497,000
State .................... 630,000 581,000 455,000
----------------------------------------------
2,848,000 2,458,000 1,952,000
Deferred tax benefit:
Federal .................. (293,000) (216,000) (37,000)
State .................... (51,000) (38,000) (7,000)
----------------------------------------------
(344,000) (254,000) (44,000)
----------------------------------------------
$ 2,504,000 $ 2,204,000 $ 1,908,000
==============================================
Not included in the above table is the income tax benefit relating to unrealized
losses on securities available for sale recognized in stockholders' equity
amounting to $464,000, $114,000 and $98,000 for the years ended December 31,
2005, 2004, and 2003 respectively.
The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate (34%) to income before income taxes:
Year ended December 31,
-----------------------------------------
2005 2004 2003
-----------------------------------------
Federal income tax ................................... $ 2,375,000 $ 2,058,000 $ 1,836,000
Add (deduct) effect of:
State income taxes, net of federal income tax effect 382,000 359,000 296,000
Nontaxable interest income ......................... (252,000) (215,000) (230,000)
Other items, net ................................... (1,000) 2,000 6,000
-----------------------------------------
Effective federal income taxes ....................... $ 2,504,000 $ 2,204,000 $ 1,908,000
=========================================
A-38
The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
December 31,
-----------------------
2005 2004
-----------------------
Deferred tax assets:
Allowance for loan losses .......................... $1,536,000 $1,317,000
Accrued reserves ................................... 149,000 109,000
Core deposit intangible amortization ............... 15,000 19,000
Nonaccrual loan interest ........................... 37,000 22,000
Depreciation ....................................... 153,000 80,000
Unrealized losses on securities available for sale . 576,000 112,000
Other .............................................. 1,000 --
-----------------------
$2,467,000 $1,659,000
=======================
The Corporation has determined that it is not required to establish a valuation
reserve for the deferred tax asset, since it is more likely than not that the
deferred tax asset will be principally realized through carrybacks to taxable
income in prior years, a history of growth in earnings and the prospects for
continued growth in the future.
Note 16. COMMITMENTS AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated financial statements. The contract or notional amounts of those
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
At December 31, 2005, the Corporation had mortgage commitments to extend credit
aggregating approximately $1.5 million at fixed rates averaging 6.32% and $0.3
million with variable rates currently averaging 5.38%. Of these loan
commitments, $1.2 million will be sold to investors upon closing. Commercial,
construction, and home equity loan commitments of approximately $14.6 million
were extended with variable rates currently averaging 7.46% and $12.6 million
were extended at fixed rates averaging 6.26%. All commitments were due to expire
within approximately 90 days.
Additionally, at December 31, 2005, the Corporation was committed for
approximately $92.6 million of unused lines of credit, consisting of $25.9
million relating to a home equity line of credit program and an unsecured line
of credit program (cash reserve), $11.4 million relating to credit cards, and
$55.3 million relating to commercial and construction lines of credit. Amounts
drawn on the unused lines of credit are predominantly assessed interest at rates
which fluctuate with the base rate.
Commitments under standby and commercial letters of credit aggregated
approximately $1.8 million at December 31, 2005, of which $1.5 million expires
within one year. Should any letter of credit be drawn on, the interest rate
charged on the resulting note would fluctuate with the Corporation's base rate.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Corporation evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Corporation upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby and commercial letters of credit are conditional commitments issued by
the Corporation to guarantee payment or performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation obtains collateral supporting those commitments for which
collateral is deemed necessary.
A-39
Rent expense under long-term operating leases for branch offices amounted to
approximately $460,000, $463,000 and $363,000 during the years ended December
31, 2005, 2004 and 2003, respectively. At December 31, 2005, the minimum rental
commitments on the noncancellable leases with an initial term of one year and
expiring thereafter is as follows:
Year Ending Minimum
December 31 Rent
-----------------------------------
2006 ............. $ 483,000
2007 ............. 478,000
2008 ............. 461,000
2009 ............. 411,000
2010 ............. 392,000
Thereafter ........ 2,730,000
----------
$4,955,000
==========
The Corporation is also subject to litigation which arises primarily in the
ordinary course of business. In the opinion of management the ultimate
disposition of such litigation should not have a material adverse effect on the
financial position of the Corporation.
Note 17. DIVIDEND LIMITATION
The Corporation's ability to pay cash dividends is based on its ability to
receive cash from its bank subsidiary. New Jersey law provides that no dividend
shall be paid by the Bank on its capital stock unless, following the payment of
such dividend, the capital stock of the Bank will be unimpaired, and the Bank
will have a surplus of not less than 50% of its capital stock, or if not, the
payment of such dividend will not reduce the surplus of the Bank. At December
31, 2005, this restriction did not result in any effective limitation in the
manner in which the Bank is currently operating.
Note 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Disclosures
About Fair Value of Financial Instruments", requires that the Corporation to
disclose the estimated fair value of its financial instruments whether or not
recognized in the consolidated balance sheet. Fair value estimates, methods and
assumptions are set forth below for the Corporation's financial instruments.
December 31,
---------------------------------------------------------
2005 2004
---------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------
(Dollars in thousands)
Financial assets:
Cash and cash equivalents ...... $ 14,028 $ 14,028 $ 24,792 $ 24,792
Securities available for sale .. 64,167 64,167 56,514 56,514
Securities held to maturity .... 37,817 37,475 40,111 40,501
FHLB-NY stock .................. 1,939 1,939 1,643 1,643
Net loans ...................... 341,976 341,156 292,909 293,623
Mortgage loans held for sale ... 2,041 2,041 228 228
Financial liabilities:
Deposits ....................... 404,128 404,393 356,918 357,100
Securities sold under agreements
to repurchase ............... 4,731 4,731 3,370 3,370
Other borrowings ............... 30,486 29,644 24,129 23,654
Subordinated debenture ......... 7,217 7,731 7,217 7,503
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents
The carrying amount approximates fair value.
A-40
Securities available for sale
All securities available for sale are actively traded and have been valued using
quoted market prices.
Securities held to maturity
All securities held to maturity are actively traded and have been valued using
quoted market prices.
FHLB-NY stock
The carrying amount approximates fair value.
Net loans
Fair values are estimated for portfolios of loan with similar financial
characteristics. Loans are segregated by type such as residential and commercial
mortgages, commercial and other installment. The fair value of loans is
estimated by discounting cash flows using estimated market discount rates which
reflect the credit and interest rate risk inherent in the loans.
Mortgage loans held for sale
Loans in this category have been committed for sale to investors at the current
carrying amount.
Deposits
The fair value of deposits, with no stated maturity, such as noninterest-bearing
demand deposits, savings, NOW and money market accounts, is equal to the amount
payable on demand as of December 31, 2005 and 2004, respectively. The fair value
of the certificates of deposit is based on the discounted value of cash flows.
The discount rate is estimated using market discount rates which reflect
interest rate risk inherent in the certificates of deposit.
Securities sold under agreements to repurchase
The carrying value approximates fair value due to the relatively short time
before maturity.
Other borrowings
Fair values are based on the discounted value of cash flows. The discount rate
is estimated using market discount rates which reflect the interest rate risk
inherent in the borrowings.
Subordinated debenture
Fair value is based on the discounted value of cash flows. The discount rate is
estimated using market disount rates which reflect the interest rate risk
inherent in the subordinated debenture.
Commitments to extend credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counter parties, and at
December 31, 2005 and 2004 were not material.
Limitations
The preceding fair value estimates were made at December 31, 2005 and 2004,
based on pertinent market data and relevant information on the financial
instruments. These estimates do not include any premium or discount that could
result from an offer to sell at one time the Corporation's entire holdings of a
particular financial instrument or category thereof. Since no market exists for
a substantial portion of the Corporation's financial instruments, fair value
estimates were necessarily based on judgements with respect to future expected
loss experience, current economic conditions, risk assessments of various
financial instruments, and other factors. Given the subjective nature of these
estimates, the uncertainties surrounding them and the matters of significant
judgement that must be applied, these fair value estimates cannot be calculated
with precision. Modifications in such assumptions could meaningfully alter these
estimates.
Since these fair value approximations were made solely for on and off balance
sheet financial instruments at December 31, 2005 and 2004, no attempt was made
to estimate the value of anticipated future business. Furthermore, certain tax
implications related to the realization of unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into the estimates.
A-41
Note 19. PARENT COMPANY ONLY
The Corporation was formed in January, 1995, to operate its subsidiary, Atlantic
Stewardship Bank (the "Bank"). The earnings of the Bank are recognized by the
Corporation using the equity method of accounting. Accordingly, the Bank
dividends paid reduce the Corporation's investment in the subsidiary. In 2003,
the Corporation formed its second subsidiary, Stewardship Statutory Trust, to
offer trust preferred securities. The following information should be read in
conjuction with the other notes to the consolidated financial statements.
Condensed financial statements of the Corporation at December 31, 2005 and 2004
are presented below:
Condensed Statements of Financial Condition Years ended December 31,
-----------------------------
2005 2004
-----------------------------
Assets
Cash and due from banks ....................................... $ 286,000 $ 49,000
Securities available for sale ................................. 4,387,000 4,483,000
Securities held to maturity ................................... -- --
Investment in subsidiary ...................................... 35,537,000 32,767,000
Accrued interest receivable ................................... 45,000 45,000
Other assets .................................................. 421,000 376,000
----------------------------
Total assets ......................................... $ 40,676,000 $ 37,720,000
============================
Liabilities and Stockholders' equity
Subordinated debenture ........................................ $ 7,217,000 $ 7,217,000
Other liabilities ............................................. 75,000 43,000
Stockholders' equity .......................................... 33,384,000 30,460,000
----------------------------
Total liabilities and Stockholders' equity .......... $ 40,676,000 $ 37,720,000
============================
Condensed Statements of Income Years ended December 31,
-------------------------------------------
2005 2004 2003
-------------------------------------------
Interest income - securities available for sale ............... $ 174,000 $ 160,000 $ 33,000
Interest income - securities held to maturity ................. -- 4,000 26,000
Dividend income ............................................... 1,386,000 325,000 275,000
Other income .................................................. 14,000 11,000 9,000
-------------------------------------------
Total income ...................................... 1,574,000 500,000 343,000
Interest expense .............................................. 487,000 487,000 141,000
Other expenses ................................................ 127,000 145,000 106,000
-------------------------------------------
Total expenses .................................... 614,000 632,000 247,000
Income before income tax benefit .............................. 960,000 (132,000) 96,000
Tax benefit ................................................... (145,000) (155,000) (61,000)
-------------------------------------------
Income before equity in undistributed earnings
of subsidiary .............................................. 1,105,000 23,000 157,000
Equity in undistributed earnings of subsidiary ................ 3,375,000 3,825,000 3,334,000
-------------------------------------------
Net income .................................................... $ 4,480,000 $ 3,848,000 $ 3,491,000
===========================================
A-42
Condensed Statements of Cash Flows Years ended December 31,
-------------------------------------------
2005 2004 2003
-------------------------------------------
Cash flows from operating activities:
Net income ................................................... $ 4,480,000 $ 3,848,000 $ 3,491,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary ........... (3,375,000) (3,825,000) (3,334,000)
Loss on sale of securities available for sale ............ -- 4,000 --
Accretion of discounts ................................... (1,000) (1,000) --
Increase in accrued interest receivable .................. -- (1,000) (44,000)
(Increase) decrease in other assets ...................... (11,000) (55,000) 2,000
Increase (decrease) in other liabilities ................. 30,000 1,000 (7,000)
-------------------------------------------
Net cash provided by (used in) operating activities .. 1,123,000 (29,000) 108,000
-------------------------------------------
Cash flows from investing activities:
Purchase of security held to maturity ........................ -- -- (1,000,000)
Proceeds from calls on securities held to maturity ........... -- 1,000,000 --
Purchase of securities available for sale .................... -- (1,991,000) (3,800,000)
Investment in bank subsidiary ................................ -- -- (3,000,000)
Investment in special purpose subsidiary ..................... -- -- (217,000)
Proceeds from sales and calls on securities available for sale -- 1,296,000 --
-------------------------------------------
Net cash provided by (used in) investing activities .. -- 305,000 (8,017,000)
-------------------------------------------
Cash flows from financing activities:
Issuance of subordinated debentures .......................... -- -- 7,217,000
Cash dividends paid on common stock .......................... (1,244,000) (1,018,000) (819,000)
Exercise of stock options .................................... 143,000 292,000 126,000
Purchase of treasury stock ................................... (561,000) (454,000) --
Issuance of common stock ..................................... 776,000 676,000 570,000
-------------------------------------------
Net cash (used in) provided by investing activities .. (886,000) (504,000) 7,094,000
-------------------------------------------
Net increase (decrease) in cash and cash equivalents ............ 237,000 (228,000) (815,000)
Cash and cash equivalents - beginning ........................... 49,000 277,000 1,092,000
-------------------------------------------
Cash and cash equivalents - ending .............................. $ 286,000 $ 49,000 $ 277,000
===========================================
A-43
NOTE 20. RECENT ACCOUNTING PRONOUNCEMENTS
FASB Staff Position FAS 115-1 and FAS 124-1 "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments"
In November 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments" (FSP FAS 115-1). FSP FAS
115-1 addresses the determination as to whether an investment is considered
impaired, whether that impairment is other than temporary, and the measurement
of an impairment loss. FSP FAS 115-1 requires that (1) for each individual
impaired security, a company assert its ability and intent to hold to recovery
and to designate an expected recovery period in order to avoid recognizing an
impairment charge through earnings; (2) a company need not make such an
assertion for minor impairments caused by changes in interest rate and sector
spreads; (3) the company must recognize an impairment charge on securities
impaired as a result of interest rate and/or sector spreads immediately upon
changing their assertion to an intent to sell such security; and (4) defines
when a change in a company's assertion for one security would not call into
question assertions made for other impaired securities. FSP FAS 115-1 is
effective for other-than-temporary impairment analysis conducted in reporting
periods beginning after December 15, 2005. The Corporation does not expect the
adoption of FSP FAS 115-1 to have a significant impact on its financial
condition or results of operations.
FASB Statement of Financial Accounting Standard No. 154 "Accounting Changes and
Error Corrections"
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections" (SFAS No. 154). This Statement
replaces APB Opinion No. 20, "Accounting Changes", and FASB Statement No. 3,
"Reporting Changes in Interim Financial Statements". SFAS No. 154 carries
forward the guidance contained in Opinion No. 20 for reporting the correction of
an error in previously issued financial statements and a change in accounting
estimate. However, SFAS No. 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. Under this statement, every
voluntary change in accounting principle requires retrospective application to
prior period's financial statements, unless it is impracticable. It also applies
to changes required by an accounting pronouncement in the unusual instance that
the pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions should
be followed. This statement is effective for accounting changes and corrections
made in fiscal years beginning after December 15, 2005, although earlier
application is permitted for changes and corrections made in fiscal years
beginning after June 1, 2005. The Corporation expects no significant effect on
its financial statements as a result of the adoption of this statement.
FASB Statement of Financial Accounting Standard No. 123R "Share-Based Payment"
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123R, "Share-Based Payment" (SFAS No. 123R). This statement establishes
standards for accounting for transactions in which a company receives employee
services in exchange for (a) equity instruments of the company or (b)
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the issuance of such equity instruments. SFAS No. 123R
eliminates the ability to account for stock-based compensation using the
intrinsic value-based method of accounting, and requires that such transactions
be recognized as compensation expense in the income statement based on their
fair values on the date of the grant. SFAS No. 123R applies to new awards and to
awards modified, repurchased, or cancelled after January 1, 2006. The transition
methods include modified prospective and modified retrospective adoption
options. Under the modified retrospective option, prior periods may be restated
either as of the beginning of the year adoption or for all prior periods
presented. The modified prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock at the beginning of
the first quarter of adoption of SFAS No. 123R, while the retroactive methods
record compensation expense for all unvested stock options and restricted stock
beginning in the first period restated. The Corporation will adopt SFAS No. 123R
in the first quarter of 2006 on a modified prospective basis, which will require
recognition of compensation expense for all stock option award that vest or
become exercisable after the effective date. The impact of adoption of SFAS No.
123R will depend on levels of share-based payments granted in the future.
A-44
Note 21. QUARTERLY FINANCIAL DATA (Unaudited)
The following table contains quarterly financial data for the years ended
December 31, 2005 and 2004 (Dollars in thousands).
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------------------------------------------------
Year ended December 31, 2005:
Interest income .................... $ 5,689 $ 6,026 $ 6,461 $ 6,724 $ 24,900
Interest expense ................... 1,287 1,547 1,847 2,008 6,689
----------------------------------------------------
Net interest income before
provision for loan losses .... 4,402 4,479 4,614 4,716 18,211
Provision for loan losses .......... 150 150 150 150 600
----------------------------------------------------
Net interest income after
provision for loan losses .... 4,252 4,329 4,464 4,566 17,611
Noninterest income ................. 649 896 854 841 3,240
Noninterest expense ................ 3,315 3,451 3,552 3,549 13,867
----------------------------------------------------
Net income before
income tax expense ........... 1,586 1,774 1,766 1,858 6,984
Federal and state income tax expense 582 635 607 680 2,504
----------------------------------------------------
Net income ......................... $ 1,004 $ 1,139 $ 1,159 $ 1,178 $ 4,480
====================================================
Basic earnings per share ........... $ 0.21 $ 0.24 $ 0.24 $ 0.25 $ 0.94
====================================================
Diluted earnings per share ......... $ 0.21 $ 0.24 $ 0.24 $ 0.24 $ 0.93
====================================================
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------------------------------------------------
Year ended December 31, 2004:
Interest income .................... $ 5,168 $ 5,167 $ 5,308 $ 5,509 $ 21,152
Interest expense ................... 1,259 1,182 1,137 1,207 4,785
----------------------------------------------------
Net interest income before
provision for loan losses ... 3,909 3,985 4,171 4,302 16,367
Provision for loan losses .......... 120 120 150 150 540
----------------------------------------------------
Net interest income after
provision for loan losses .... 3,789 3,865 4,021 4,152 15,827
Noninterest income ................. 594 760 674 698 2,726
Noninterest expense ................ 3,033 3,153 3,097 3,218 12,501
----------------------------------------------------
Net income before
income tax expense ........... 1,350 1,472 1,598 1,632 6,052
Federal and state income tax expense 483 535 584 602 2,204
----------------------------------------------------
Net income ......................... $ 867 $ 937 $ 1,014 $ 1,030 $ 3,848
====================================================
Basic earnings per share ........... $ 0.19 $ 0.20 $ 0.21 $ 0.22 $ 0.82
====================================================
Diluted earnings per share ......... $ 0.19 $ 0.20 $ 0.21 $ 0.21 $ 0.81
====================================================
A-45
He is like a man building a house, who dug deep and laid the
foundation on the rock. And when the flood arose, the
stream beat vehemently against that house, and could
not shake it, for it was founded on the rock.
LUKE 6:48
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TWENTY YEARS
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[IMAGE OMITTED]
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[LOGO] Atlantic
Stewardship
Bank
[LOGO] SFC
STEWARDSHIP FINANCIAL CORPORATION
AND SUBSIDIARY
630 Godwin Avenue, Midland Park, NJ 07432
201-444-7100 877-844-BANK www.asbnow.com